“Will doing X improve my credit score?” is a question we see all the time. Buying a car, paying off a credit card, getting a larger credit line, and paying your utility bills on time are all things that help your credit report and score, right?
What about buying a home, will that improve your credit report and score? The answer depends on the amount of time you’re looking at and is highly subjective. In short, there is no easy answer. Let’s take a look at what kind of purchase can improve your score and, more importantly, when.
What Makes Up Your Credit Score?
We all know a bit about what makes up our credit reports and scores. Your report lists all of your outstanding debts and those that have been paid off.
All of that information is combined to produce a score. That score is made up of a number of different elements, each weighted differently, including your on-time payments, the number of open accounts you have, the types of accounts, and something called your credit utilization rate.
What makes up your score:
- Payment History – Do you make your payments on time, regardless of the type of loan?
- Credit Utilization – How much of your available credit do you use?
- Length of credit history – How many years have you been an active credit user?
- Mix of credit types – Do you have a variety of different types of credit, like mortgages, auto loans, personal loans and/or auto loans?
- Recent applications – How many times have you applied for credit?
All of these factors are important and, in terms of raw percentage of your credit score, your on-time payment history is the most important – it makes up about 35% of your score.
However, the other elements are important as well. Your length of credit will drastically affect your score and it’s virtually out of your control.
The one other area you do have control over is your credit utilization, and this is where buying a house may, or may not, help your credit score. Your credit utilization is the amount of your credit that you used compared to the amount available to you.
The ideal percentage is no more than 30%. So, if you have $100,000 of credit available to you, you want to stay under $30,000.
Types of Loans Matter
Now you may be saying to yourself, “with thinking like that, how does anyone buy a home?!” And you’d be right. If pros recommend keeping your credit utilization below 30%, how are you going to purchase a home for way more than that?
It’s important to remember that types of loans matter a great deal. If you’re using a whole host of credit cards and carry high balances, your score will suffer. If, however, you’re carrying some credit card debt, but live under the 30% utilization rate, you should be just fine.
But what about that mortgage? Well, prospective lenders know that a mortgage is different from a credit card, and different from an auto loan. They’ll look closely at your report more broadly and change accordingly.
This is because mortgages and auto loans (or closed end loans) are far more likely to be paid. In short, mortgages are looked upon far more highly in your report than other loans.
Long-Term or Short-Term
In the short term, your score will take a large hit when you apply for and sign a mortgage. This is because you’re adding a large debt obligation. Your score will even out as you begin to make appropriate payments. This can take as long as two years.
So, your score will suffer over the short term. Over the long term, however, successfully paying a mortgage will improve your score. This is incumbent on making on-time payments, however, so be sure you do your homework. You need to actually be able to make on-time payments.
So I should take out a mortgage to improve my score?
Well, yes and no. If you are taking out a mortgage anyway and know that you can afford to repay the loan, then a mortgage will, broadly, over a longer scope, improve your score.
There are, however, far better and easier ways to improve your credit score other than buying a house. If your goal is to improve your score, consider paying down open balances and using credit already available to you.
If you have negative and inaccurate information on your report, contact credit bureaus to have those items removed. DIY’ing your own credit repair can potentially improve your credit score. Or, you could choose to look into our best credit repair company rankings for an agency who can take care of this process for you.
You may also want to consider using credit cards for everyday purchases and pay off the entire balance each month. Most importantly, ensure you pay on time and keep accounts open and used.
Your length of credit history is one of the most important factors of a high score. Between on-time payments and credit age, given time, your score will be on the upswing.