How Buying a House Affects Your Credit

If you’ve just bought a new home, chances are you spent quite some time worrying about your credit score. After all, your credit score affects your ability to get a mortgage, and the interest rate you’ll pay on that mortgage.

But what happens to your credit score after you’ve purchased a home? That’s a complicated question with a complicated answer.

Credit Inquiries Cost Some Points

You’ll likely start seeing minor dings in your credit score as soon as you begin applying for mortgages. When you apply for pre-approval, lenders will pull your credit score. When the lenders do perform a hard credit pull, it tells the credit scoring algorithm you’re looking for new credit, which will cause a small drop in your credit score.

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You can limit this effect while mortgage shopping by applying for pre-approval with several companies within a two-week period. Some credit scoring models will give you a longer period than this, but keep it to two weeks to be safe. When you limit your mortgage shopping to a short time period, you’ll still get a ding on your credit score, but it will be smaller. (You can view two of your credit scores for free by signing up for an account on Credit.com.)

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New Credit Costs Even More

Applying for mortgages will ding your credit a bit, but actually opening a mortgage will cost even more points, especially if this is your first home loanmortgage. The large increase in overall debt will definitely cause a drop in your credit score.

Luckily, installment debts like a mortgage cause less of a score decrease than high-balance revolving debts like credit cards. Still, though, you’ll likely find that your score drops by a few points once the credit bureaus pick up your new mortgage account.

But Adding to Your Credit Mix Is Good

If you’ve never had a mortgage before, adding one to your credit profile can ultimately be a good thing. Approximately 10% of your credit score is made up of your overall credit mix. The more variety, the better!

Once your credit score gets past the temporary ding from the inquiries and taking out a new account, it may actually increase because you’ve expanded your credit mix.

And Making On-Time Payments Is Even Better

Ultimately, if you make your mortgage payments on time, you should see a fairly quick increase in your credit score. In fact, within a few months, barring any other issues, your credit score will likely be higher than it was before you first applied for a mortgage.

When you buy a home, it’s important to be prepared for your credit score to temporarily drop. This happens any time you pick up a new credit account. But once you get past the initial drop, financially responsible homeownership will likely increase your credit score more than ever before.

Image: Justin Horrocks