Credit scoring is not always simple to explain, or easy to understand. One reason why credit scoring is so complicated is because specific actions as reflected on a credit report do not have a specific credit score point value. You cannot say, for example, that if you open a new mortgage account your credit scores will increase by 25 points. That is not how credit scoring works. A new mortgage could impact your credit scores very differently than it impacts the next guy.
How Buying a House Could Impact Your Credit Scores
The truth is that the credit score impact of taking on a newly opened mortgage will largely come down to how you manage your account. Assuming that you manage the account well and keep all of your payments on time, there are a number of ways that a new mortgage might actually help to improve your credit scores despite the large debt that always accompanies a mortgage loan.
Roughly 35 percent of your FICO and VantageScore credit score points are based on a category known as "Payment History." Your payment history, in fact, is the most important factor considered whenever your credit scores are calculated. If you maintain on-time payments on your new mortgage loan, your credit scores could be impacted positively.
Mix of Credit
Credit scoring models are also designed to reward you whenever the accounts that appear on your credit reports are diverse in nature. If you add a new mortgage account to your credit reports where a mortgage did not exist previously it could have an immediate impact on your scores, for the good.
Age of Credit
Credit scoring models do not consider your personal age in the calculation of your credit scores. The average age of the accounts on your credit reports, however, is a factor. The older the accounts on your credit reports, the better. At first a new mortgage might hurt you in this scoring category because you’re going to lower the average when the new account hits your credit reports.
Despite all of the credit building potential, there are still some ways in which a new mortgage could impact your credit scores negatively.
When you apply for a mortgage, the lender is going to pull a copy of your three credit reports as part of your application process, perhaps even multiple times prior to closing. These credit pulls result in "hard inquiries" and they have the potential to lower your credit scores. The good news is that inquiries are only worth 10 percent of your score points.
Accounts with Balances
The balance of your new mortgage could have a very modest negative impact on your credit scores. Credit scoring models are designed to consider the number of accounts with balances on your credit reports, plus the relationship between your account balances and original loan amounts. Of course, since your new mortgage will be an installment account and not a revolving account, like a credit card, any negative impact in this area should be only minor.
This is counterintuitive because you may believe that all debt is bad for your scores. This isn’t really true because some debts are more stable and less predictive of elevated credit risk than others. For example, credit cards default at a higher rate than mortgage loans. The reason, obviously, is you don’t want to lose your home to foreclosure so if funds get tight, you’re more likely to prioritize your home and auto loans over your credit card accounts.