When it’s time to buy a house, few people can afford to pay entirely in cash.
Most homebuyers opt for a mortgage or a home loan. Like all major lines of credit, a mortgage will appear on your credit report. For most people, this is beneficial. A mortgage can help build your credit in the long run, provided you pay as agreed.
Payments that are made on credit cards are called revolving (reusable) credit. A mortgage (like a car or student loan) is an installment loan.
When it comes to your credit profile, it is important to understand that there are factors that affect your credit. Look at the table below to see the main factors that affect your credit:
| Credit History Factor | Level of Impact on Credit |
|---|---|
| Payment history | 35% |
| Amounts owed | 30% |
| Credit history length | 15% |
| Credit mix | 10% |
A mortgage adds to your credit payment history
From the table above it can be seen that payment history has the highest impact on credit profile and scores. Payment history accounts for 35% of a person’s credit score. A single missed payment can deliver a serious blow to your credit report. Creditors want to make sure that timely payments will be made when they loan money out. Therefore, repayment history is weighed heavily.
Mortgages hit the nail on the head when it comes to a person’s credit profile. It is an installment payment that is is weighted heavily on a person’s credit profile.
Since mortgages typically require 15 to 30 years of payments, making payments on time over the life of the mortgage looks good to creditors and will positively reflect on a person’s credit profile.
A mortgage adds to credit history length
Since a mortgage is an installment payment model that takes many years, a mortgage will add to the credit history length. Credit history length contributes to the age of your credit, or how long you’ve had credit, which may help.
Credit history length may affect a person’s credit score by as much as 15%. Therefore, if you miss payments, expect a drop in your credit score. Conversely, if your payments are made on time, you will see your credit score inch in the upward direction.
A mortgage diversifies your credit
The average person primarily has credit cards, students loans, and auto loans. However, credit mixes such as credit cards, auto loans, and mortgages also affect your score. The more credit mix there are, the more positive the impact on a person’s credit score.
A new credit may temporarily cause a dip in credit
New credit and hard inquiries may temporarily lower a person’s credit. New credit can negatively impact a credit profile by as much as 10%.
Conclusion
Pound for pound, paying a mortgage has a better long-term impact on your profile compared to paying rent. Typically, paying rent will not add to your credit profile.
It may be more beneficial to own your own real estate, especially if you will be staying in one location for a long time.
Initially, a mortgage will temporarily lower your credit. However, as the algorithm monitors your credit profile, it will change and usually in a positive direction, if a creditor continues to make timely payments and keep s their credit mix diverse.
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