Can paying off your mortgage hurt your credit score?
FICO score impact depends on what else is in your credit report
By Brady Porche | Published: February 27, 2017
Focusing on credit scores and what consumers can do to improve them
Paying off a mortgage is a hallmark of homeownership – but can it kill your credit score?
In most cases, paying off your mortgage does not help or hurt your credit score in any significant way. It could have a small negative impact if the mortgage was your only installment loan, according to the credit reporting agency Equifax’s website. After all, “credit mix” accounts for 10 percent of FICO’s traditional credit scoring model. But if you never missed a payment over the life of the loan, that could offset any points lost due to the loan falling off your credit report.
Results vary depending on each person’s credit situation. Brad Kingsley, who is semiretired and now works as a business and financial coach, paid off the home he owns with his wife after selling a business they grew over a period of 20 years. Within two years of paying off the mortgage in full, the Kingsleys’ credit score dropped by 100 points.
The precipitous drop is both atypical and mystifying. Kingsley said he and his wife had three high-limit credit cards open at the time they paid off their mortgage.
“We’ve never had a late payment,” he said. “We still have the three credit cards – we use one of them and pay it off monthly.”
Paying on time and using a relatively small amount of your available credit are the best things you can do to maintain an excellent score. Perhaps Kingsley’s case is one of reversion to the mean. He described his credit score as being in the “mid-800s” before paying off his mortgage. A near-perfect credit score can be hard to maintain, and maybe the Kingsleys fell to earth because their credit mix no longer contained an installment loan. It is also possible that the balance on the one card they use tends to be at its highest at the moment the issuer updates the credit bureaus each month.
Upon successful completion of paying off a mortgage, the impact to the score depends on what else is going on credit-wise for that consumer.
Vice president and consumer data leader, Equifax
Meanwhile, Timothy Wiedman, a retired university professor from Nebraska, had a different credit score experience when he sold his home in 2007. At the time of the sale, his FICO score was a sterling 797. Wiedman had five longstanding card accounts on his credit report, but no installment loans other than the paid-off mortgage. After selling the home, his credit score steadily improved to 815.
Like the Kingsleys, Wiedman’s credit was unblemished, aside from one late payment caused by a mail snafu.
“I’ve had three mortgages, as I’ve bought and sold various homes, and I’ve never missed a mortgage payment,” Wiedman said. “I’ve never missed a credit card payment either, although once a payment was lost in the mail, and I paid it as soon as I received the ‘late’ notice. I called the issuer immediately, and they reversed the late fee and didn’t raise my interest rate.”
The credit score impact of paying off a mortgage can be hard to predict, but other information in the consumer’s credit report can contribute to its rise or fall.
Home loan only one
piece of the puzzle
A paid-off mortgage usually has minimal positive credit rating impact because an installment loan origination doesn’t lower your score in the first place.
“Upon successful completion of paying off a mortgage, the impact to the score depends on what else is going on credit-wise for that consumer,” said Mike Catanese, vice president and consumer data leader at Equifax.
If you retain a good score or gain points after paying off your mortgage, chances are you have other trade lines with long, unblemished payment histories. Payment history and length of credit history account for 35 percent and 15 percent of your FICO score, respectively. What’s more, if you never missed a payment on your closed mortgage, that positive information will remain on your credit report for up to 10 years.
Getting to the finish line of your mortgage could have a slight negative impact if you aren’t actively using other credit. If a home loan is your only trade line at the time you pay it off, you could eventually become “credit invisible” – not having enough credit information to get a FICO score. This can happen if you have no active accounts that are at least six months old and no account updates from creditors or lenders within the past six months. It gets more problematic as time passes, unless you have sworn off debt forever and have no use for a credit score.
“The longer the period of inactivity, the harder it is for a lender to understand your credit situation,” said Jason Flemish, vice president of consumer care at Equifax.
There are different ways to rebuild your credit if you become “unscorable.” One method is to open a new credit card and use it sparingly, paying the entire balance on time each month. You could also take out a small personal loan for an amount of money that you know you can pay back within a reasonable time frame. Flemish recommends that consumers with no recent credit history borrow from any banks with which they already have relationships.
“If you’re doing business with a bank, they have information on you, even if it’s only a checking or savings account,” he said. “That may help you re-establish credit a little better because they know something about you.”
The longer the period of inactivity, the harder it is for a lender to understand your credit situation.
Vice president of consumer care, Equifax
However, consumers should never take on unmanageable debt just to stay on the credit bureaus’ radar.
“Each consumer has to decide what type of credit activity he can handle,” Catanese said. “If he’s not sure he can handle that credit reliably, he probably shouldn’t open it just to keep credit active. It’s not great to be credit inactive, but it’s worse to have bad credit.”
A consumer who suffers a significant score drop after making a final home loan payment likely has other black marks on her credit report. Credit missteps such as late card or loan payments, collections and judgments stay on your credit report for up to seven years.
Keep a mix of credit
– but use it responsibly
Maintaining a high FICO score with a diverse credit mix that includes a home loan can be tricky enough. It can be tempting to rely on credit cards for everyday spending if a large portion of your income is being used to pay your mortgage and a car or student loan. Carrying a high card balance from month to month, however, increases your interest charges and, in turn, the likelihood that you will miss a payment. A perfect record of mortgage payments can only do so much to cover up other mistakes.
A paid-off mortgage is something to celebrate, no matter what it does to your credit mix. You’ve reached one of life’s biggest financial milestones and freed up a large chunk of your income for other priorities. You’d be forgiven for not checking your FICO score for a little while.
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