Your credit score might take a hit after you get a mortgage, but don’t worry
After buying a home, you might be surprised to find that your credit score is dropping. For a new homeowner who has probably spent months making sure their credit rating only goes up, this might sound worrisome. Fortunately, it’s not uncommon for your credit rating to drop after a major credit purchase. Plus, the impact on your credit score will be temporary as long as you make your payments on time each month.
If you look at your lower credit score in dismay, it can help to understand a little bit about the credit score pattern and why your number has gone down.
Why did my credit score drop after I applied for a mortgage?
Your credit score has dropped for several reasons. First, when you apply for a mortgage, lenders do what is called a “serious investigation”. A serious investigation means the lender gets your entire report and scores your credit. This type of request appears on your credit report and can affect your credit score. If you have too many difficult inquiries in a short period of time, some lenders might be reluctant to extend credit.
Second, when you took out your mortgage, your total debt went up and affected your debt-to-income ratio (DTI) and your use of credit.
You can ensure that you are not denied credit by improving your score and paying your bills on time, avoiding collection accounts, or even signing up for credit monitoring or fraud alerts to make sure that ‘there is no fraud or error on your credit.
You can help by taking preventative measures when looking for a lender. Visit a online mortgage broker like Credible to get personalized rates in minutes without affecting your credit score.
What factors have an impact on your credit score?
Several factors make up your credit score. Credit rating companies look at:
- Payment history
- Use of credit
- Age and credit composition
- Difficult investigations
Payment history: Your payment history is the most important part of your credit score. It makes up about 35% of your total credit score. If you need to improve your credit, making your payments on time each month is the fastest way to get an increase.
Total of : How much debt do you have compared to your income? Also, how much of the total debt you have do you use? Ideally, you should aim to keep your credit card balances below 50% of your available limit to avoid a bad credit score. Your debt represents 30% of your total credit score.
Age and credit composition: Having older credit accounts with an on-time benefit history can dramatically improve your credit score. So if you have old credit cards that you aren’t using, consider leaving them open on your credit report to keep your average credit age higher.
What type of debt do you have? Too many credit cards on student loans, mortgages, or personal loans could affect your credit score. The age of your credit and your credit combination make up 25% of your credit score.
Serious requests / new debt: New debt and inquiries make up about 10% of your credit score. You can prevent your score from dropping and giving you bad credit if you don’t open too many new accounts at once. Serious inquiries also affect your credit score. When applying for a mortgage, consider shopping around for several lenders within a few weeks to limit the effect on your credit score.
You can explore your mortgage options by visit Credible to compare rates and lenders.
How will my credit score increase over time?
Credit scores take time. Most lenders report payments and other information to credit reporting companies once a month. It can take several months of good behavior for the credit bureaus to report positive effects on your credit score.
Your credit score will increase over time as you continue to make on-time payments on all lines of credit, including personal loans, student loans, credit cards, and mortgages. You should focus on reducing those balances and letting your credit age.
Negative marks on your credit, such as too many inquiries, late payments, foreclosure, or lawsuits, affect your credit score less and less over time. Eventually, they will drop off your credit report. If you notice that your credit score increases by a few points in a month, this could be the reason.
Your credit will likely be better in the long run
Although your credit score will take a small hit at first, your credit score will likely improve in the long run. Since a mortgage typically takes 15 to 30 years to pay off, your credit age will increase each year. A mortgage allows you to diversify the type of debt you have. One-off payments over multiple years will boost your credit score.
When you’re ready to research mortgage lenders, head over to Credible. Credible can help you compare several mortgage lenders at the same time in just a few minutes. Use Credible’s online tools and get prequalified today.
Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.