How Making a Monthly Mortgage Will Help Your Credit
Did you know that making your monthly mortgage payment on time will help your credit score?
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If you’re thinking of purchasing a home, it’s important to understand that not only will this be one of the largest purchases you make, but the amount you’re ultimately approved for will depend on your credit. Your credit score is used by lenders to determine your creditworthiness, and whether or not you will be able to comfortably pay back your mortgage debt each month.
But did you know that once you’re approved for a mortgage and start paying off your loan, it can actually help out your credit? That’s right, in this article we’re going to discuss this and more including:
- Factors that determine your credit score
- How mortgages may help your credit
- Other ways to boost your credit score
What determines your credit score?
Know what is affecting your credit score
If you’re thinking of applying for a loan to purchase a house, there are a lot of things you’re going to want to consider. One of the major items to think about is knowing your credit score. Having a handle on what your credit looks like can be the difference between a higher or lower interest amount, and be a factor that determines how much you’re approved for to purchase your dream home.
There are three national credit bureaus, Experian, TransUnion, and Equifax, and each have their own report. Your lender can choose to look at all three, or just one or two credit bureaus when assessing your creditworthiness. Your credit score consists of a variety of elements:
- Your amounts owed. This is the amount of outstanding debt you still have. It will also be used to determine your debt to income (DTI) ratio.
- Your payment history. Another important part of your credit score is your payment history, including on time payments and any late payments that were reported.
- Length of credit history. Showing a history of managing credit accounts is a good way to prove you can take out debt and pay it back.
- New credit. Making new credit inquiries may hurt your score if done in excess, but it can also show that you do have the ability to start making on time payments once again.
- Credit mix. Having a mix of installment and revolving credit can help your score.
You know how important making on time payments are for your credit accounts, and when the time comes, a mortgage is no different.
How does making a monthly mortgage payment help your credit?
On time mortgage payments are a solid way to help your credit
Because our credit reports show how we’ve handled credit in the past, they are an important part of the home buying journey. If you’ve been approved for a mortgage, the most important thing you can do each month is ensure you’re paying it on time. But how does taking out more debt (such as a mortgage) help your credit? Since a mortgage loan for a house is one of the largest purchases you’ll make, when you’re approved, it signals that you have steady income, have some savings, and have a good credit score.
Mortgage loans are also typically for a longer period of time, the standard mortgage loan is for 15 or 30 years. This is a serious commitment, and one that most people do not take lightly. Adding a mortgage to your credit report also includes a new dimension to your credit mix that we discussed earlier, since it is not a credit card. Having a mix of different kinds of credit accounts makes you look appealing, since not only are you working to pay down credit card or car loans, but now also a mortgage.
After you’ve applied for and been approved for a mortgage, you may want to wait before you open any additional lines of credit until you’re used to paying your new mortgage each month. Consistently paying your mortgage on time is a great way to keep improving your credit. When creditors access your credit history, they will see that you’ve been able to take on one of the largest types of loans, and are working to pay it back each month.
Once you’ve had a few months to get used to sorting out your debts (including a mortgage now) you could consider opening up new accounts, but if you don’t have to. It’s not a bad idea to continue to pay down the debt that you already have.
Making the decision to apply for mortgages is a step in the right direction if you want to improve your credit. When you start to pay your mortgage monthly, you will reap the benefits of a steady stream of on time payments to report to the credit bureaus. Paying rent each month does not come with this same perk, which is just another reason that buying a home could be a good decision for you financially.
Other ways to improve your credit
Paying your mortgage on time is only one way to help your credit
In addition to keeping up to date with your mortgage monthly, there are other ways you can continue to strengthen your credit such as:
- Don’t miss payments for credit cards, loans, or utilities
- Catch up on any past due accounts
- Work to pay off high interest credit cards first
- Apply for new credit only when you need to
One of the best things you can do to improve your credit is to avoid falling behind or missing payments. When payments are missed, they are then reported to the credit bureaus, which can hurt your credit. You also want to show that you’re making on time payments consistently, as this proves that you’re reliably working to pay down loans and credit cards. This is true for your mortgage as well!
Keep building your credit by staying up to date with your mortgage payments, and maybe even paying a little extra when you can!
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