How Homeownership Affects Your Credit: It isn’t Just about Your Mortgage

When we talk about homeownership, and how that impacts the health of your credit, we’re usually talking about the mortgage loan. And while a mortgage loan is vitally important to your overall financial health and creditworthiness, there are many more factors involved with homeownership that can affect your credit.

Mortgage and other financial data that appear in your credit report can have a big impact on your credit score, but your score isn’t everything; there are situations where your credit report will be consulted and your score is not accessed, like a pre-employment credit check.

It’s important to think beyond just the credit score impacts when you assess the overall health of your credit and the information contained in your report.

• Learn more: see our free Understanding Your Credit Report & Score course, available in our FIT Academy.

How getting a mortgage loan affects your credit

Like we said, the first thing one thinks of when it comes to homeownership and credit is the mortgage loan itself. This loan has a huge impact on your credit in various ways:

Do Mortgage Pre-Approvals Affect Credit Scores?

If the mortgage pre-qualification uses an estimated credit score, or if the lender checks your credit with a soft inquiry (also called a “soft pull”), your credit won’t be affected.

Will Applying For a Mortgage Affect My Credit Score?

When you first apply for a new mortgage, your applications for new credit will impact the “inquiries” section of your credit report. Your score will be temporarily affected, as inquiries count for 10% of your available score.

Beyond the score, anyone reviewing your report will see that you’ve recently been applying for a mortgage loan.

These days, shopping around for the best rate on a mortgage shouldn’t hurt you or your credit score much; any inquiries within a 14 to 45-day period are combined and treated as one single inquiry for the sake of calculating your score, so you should definitely shop around for the best mortgage rate. It’s hard to know in advance whether the scoring model your lender uses will group inquiries made to a 14 or 4545-dayday window. The window to bundle depends on which version of the scoring model used, and it will likely disregard mortgage inquiries from the prior 30 days.  In any case, you will definitely have only one inquiry if you keep those applications grouped within a 14-day period.

The impact from inquiries on your score will be small, and is one of the fastest things to go away; inquiries for new credit are only considered for the last 12 months, and drop off your report entirely after two years.

Does Having a Mortgage Affect My Credit Score?

After you apply for and get one, having a mortgage does affect your credit score. A healthy credit report should contain a mix of different kinds of accounts. If your report contains only credit cards or only one loan, then you’re not demonstrating a strong enough ability to manage different kinds of debt.

10% of your FICO score is based on your credit mix, so having a mortgage along with other kinds of debt is a positive factor in your score.

• Learn more from our Q&A: What is Credit Utilization?

How Paying Your Mortgage Affects Your Credit

Payment history shows how consistently you’ve paid your accounts over the length of having available credit and has a large impact on your credit score. According to MyFico, 35% of your FICO score is based on your payment history.

Make all of your mortgage payments on time, and your score will go up and stay strong. Miss payments, and you will see a significant drop.

Does Debt-to-Income Rate Affect Your Score?

Your front-end debt-to-income ratio (DTI), or the housing ratio, should be around 36% of your total gross income; that means around a third of your gross monthly income can go towards paying mortgage payments, mortgage insurance, etc. If you are paying too much more than that percentage, your credit will suffer.

Note that your credit score won’t be affected directly. Income has no effect on one’s credit score, and income is a critical part of the debt-to-income ratio. But any lender thinking of offering you a loan will calculate your ratio and decide if you can afford the loan they are offering.

• Learn more about debt-to-income ratios from our article “Debt-to-Income Ratios: How to Calculate DTI”

The Length of Credit History Will Impact Your Score

Your length of credit history makes up 15% of your FICO score. Since mortgage loans are long-term, they become an excellent boost to this part of your score over time. Every passing month in your home with a mortgage loan should improve your credit.

How Home Improvement and Renovation Projects Affect Your Credit Score

Besides the mortgage, common homeownership activities like renovations and home improvement projects will have an impact on your credit.

Increased home resale value lowers your credit utilization.

If a home improvement or renovation project increases the value of your home, it’s technically improving your credit utilization ratio because your loan is a smaller percentage of the home’s value after the improvements.

But you wouldn’t see this improvement on your credit report or score, since your report doesn’t show what your home is worth, only what you owe on it.

If you then seek out something like a 2^nd mortgage or refi, you’ll get better terms because of the home’s newly increased value.

• Read more: “Easy Renovations to Help Increase the Resale Value of Your Home”

How You Pay For Renovations Can Affect Your Credit Score

If you finance your home improvement project, the way you borrow to pay for the work can vary widely:

1. Credit card debt

Using credit cards makes it harder to control costs and have a predictable repayment plan. This debt could negatively impact your credit by upsetting your utilization ratio and debt-to-income ratio.

2. HELOC (Home Equity Line of Credit)

HELOC has a low rate, and is flexible. But it involves applying for a new loan, which brings along all the usual impacts to your credit from new borrowing. Plus, it draws on your home equity to fund the loan, which reduces your ownership stake in the home.

3. Home equity loans

A home equity loan is like a HELOC, but a lump-sum amount borrowed against your home equity, not a line of credit.

4. Mortgage refinancing

If you refinance your mortgage and the new monthly payment is lower, that will free up cash flow to fund renovations and improve your debt-to-income ratio. Refinancing your loan can be a good move if you’re getting a new, permanently lower mortgage rate, but it does restart the clock on paying off your mortgage loan.

5. Cash out refinance

When refinancing, you can take out some funds from home equity to improve the property, but you’re spending away the wealth from what’s probably your primary asset.

6. Personal loans

A personal loan is a simple lump-sum amount borrowed based on your personal credit, not backed by home equity or other collateral. That makes this loan a little more expensive and tougher to get.

Generally, personal loans are installment loans with a consistent monthly payment that won’t vary. Installment loans are not factored into your credit utilization, because they are not revolving credit.

Major Appliances and Systems

Decades ago, the best way to establish and build a good credit score would be to buy a major appliance with a small loan.

These kinds of loans were secured, so they were easy to get; if you didn’t pay, the lender would reclaim the appliance. These loans were also fixed—you borrow a set amount for a refrigerator or stove, then pay it off on a set schedule.

Unfortunately, this excellent vehicle for credit building is now vanishingly rare. These days, if you want to finance the purchase of an appliance, you will likely be directed to apply for a credit card.

Using credit cards to buy household appliances is probably not going to help build your credit score, for various reasons:

1. It doesn’t help your credit mix

Part of the idea behind a loan for an appliance is that it’s not another revolving credit account. A different kind of loan helps your “credit mix” which is good for your score.

2. It Isn’t as Affordable

A revolving credit card carries double-digit interest rates, and involves a risk to the lender that a secured appliance loan doesn’t have. If you don’t pay your credit card bills, no one repossesses the things you bought on credit.

3. Credit Cards Linger

The obligation on an appliance loan goes away when it’s paid off. A credit card account remains open, where you’ll have the capacity to charge it up and keep spending.

On the one hand, having a credit card balance available that you don’t use can help your utilization rate, but people tend to have more open credit card accounts than they need, and adding another revolving credit account to your financial picture is rarely something we’d recommend for the sake of boosting your credit.

4. Debt accumulation risk

Another way of making that last point is, credit cards cause you to accumulate debt. They’re designed to never be paid off, and it’s easy to let a credit card balance linger—and accumulate interest—for many years. An appliance loan gets paid off on a set schedule, boosting your credit score all the while.

• For another take, see our article “Opening a Store Card Can be a Good Idea—If You’re Careful”

If you can still get a secured loan for appliances and the like, it can be a good way to build good credit, and less expensive than using credit cards as well.

But beware of “rent-to-own” deals, which aren’t the same as the secured personal loans we’re talking about. Rent-to-own deals are in fact not a good deal financially, and don’t help your credit score even if you pay as agreed.

Besides furniture and appliances, another major expense you may have to finance are major systems, like a new roof, air conditioner, or furnace.

These kinds of projects are expensive enough that financing with a personal loan is more common, so you don’t have to make this purchase on a credit card with 20% interest. In fact, you may be able to get a loan for something like an HVAC system at a rate similar to what you pay on your mortgage.

Whether it makes financial sense to borrow at all is a different question—if your new heating and cooling system means lower monthly energy bills, that can offset some of the monthly cost of your new loan to pay for that system.

Utilities and other bills

Because your household utility bills are not loans, they don’t help your credit score in the traditional way. But an unpaid utility bill will almost certainly be reported to your credit report, where it will have a negative impact.

Late bills

A bill that is less than 30 days late will be unlikely to have any effect on your credit. But once you’ve been late by more than 30 days, the debt will probably be reported to your credit report and damage your score.

Worse, utility companies will send the debt to collections, sometimes very quickly. One common situation is when a homeowner or renter moves, but forgets to pay the last bill for a service like garbage collection or some utility. The company may just assume they have no way to get in touch with the debtor, so they go straight to collections.

Collection agencies will pursue much more aggressive tactics to collect unpaid bills, including negative credit reporting that will have a significant detriment to your credit score.

Non-Credit Background Checks

When you sign up for new utility services, some companies may perform a background check and consult industry reports that are not the same as a credit report.

These service provider reports will indicate whether you have consistently paid your utility bills on time. If the company finds you have a good payment history, you will be much likely to obtain service. If you have a history of missing payments or being late to pay, you may be denied service, or have to put down a large deposit to obtain service.

In this way, utility bills can have a large impact on your financial life, even if they don’t show up on your credit report at all.

Alternative Credit

So utility bills paid on time won't help your credit, but late payments will hurt it. If this situation seems unfair, that’s because it is.

In recognition of this fact, “alternative credit” is on the rise. Even major credit bureaus like Experian offer special services (namely, Experian Boost) that use your timely utility bill payments to boost your FICO score.

Not all creditors will use these alternative credit scores, but they are an option that can make utility bill payments a positive contributor to your credit score.

We discuss alternative credit products, like FICO XD and CoreLogic's Credco, in our article, “How to Build Credit Without Using a Credit Card”.

Ultimately, having a mortgage and paying it on time every month is a great credit score builder, but it’s not the only factor. All of the bills you pay and regular expenses that go into maintaining and improving a home will have a big impact on your credit.

Be mindful of how you pay for your life as a homeowner, particularly if you’re financing things with loans or credit cards. If you think you may be facing debts you can’t easily handle, get free debt counseling from a certified counselor before things get any worse.

If you’re not sure how your credit is looking or how homeownership has impacted your score, get a credit report review so you can do a deep dive into your credit, what is affecting it, and how to improve your score over time.