Having a mortgage is something you could easily end up doing for 30 years. Even if you manage to pay off your home sooner, there’s a good chance you held that loan for many years before ending it. A mortgage paid off is an important milestone that deserves to be celebrated. But in some cases, paying off a mortgage could actually hurt your credit score slightly.
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Why paying off a mortgage could hurt your credit rating
You would think that paying off a loan would have a positive impact on your credit score because it shows that you are not borrowing as much anymore. But in some cases, a small blow to your credit score can ensue when your home is paid off.
That said, the blow in question should be of a minor nature. Your credit score can drop by about 10 points after your mortgage is paid off, but we’re not talking about a hard hit like the one you would face if you were to be late with a few mortgage payments.
So why would paying off your home lower your credit score? It comes down to how credit scores are calculated.
There are five factors that go into calculating a credit score:
- Your payment history, which shows how quickly you pay your bills
- Your credit utilization rate, which measures how much of your available revolving credit you are using at a time
- The length of your credit history, which shows how long you’ve had different accounts
- Your new credit accounts, which show the number of loans and credit cards you have recently applied for
- Your credit mix, which shows the types of loans you have
Of these factors, your payment history and your credit utilization rate carry the most weight. Paying off a mortgage could affect the length of your credit history as well as your credit mix.
If you don’t have long-standing accounts in your name other than your home loan, and you’re paying off your mortgage, which you may have held for decades, it could lead to a shorter credit history – and a bit credit score damage. Likewise, if paying off your mortgage leaves you with only credit card accounts in your name, it could have a bad impact on your credit mix (since mortgages are a healthy type of debt and credit cards are not. are not). As such, your score could take a minor hit.
Should you avoid paying your mortgage early because of credit score issues?
You may decide not to prepay your mortgage because you have an affordable interest rate on that mortgage and want to free up your money for other purposes. But if you’re able to pay off your house earlier than expected and think it’s the right choice for you, don’t let worries about your credit score stop you.
As mentioned above, any impact on your credit score resulting from a mortgage payment should be minor. If paying off your mortgage is helping you improve your financial situation, it’s a worthwhile move.