Paying off your mortgage will affect your credit score, but the impact will vary depending on your individual circumstances. The higher your score is, the less of an effect paying off your mortgage will have. Other personal financial circumstances must be considered when calculating how your credit score will be affected.
Effects
Paying off your mortgage can help to boost your credit score. Credit scores take into account the ratio of available credit you have to what you have utilized. If you have a lot of credit available to you but do not use it all, this reflects better than if you tend to use a large percentage of your available credit. However, personal finance author Liz Pulliam Weston notes that paying off a mortgage will likely not have as great an effect on your credit score as paying off unsecured revolving debt such as credit cards. Consider paying those off before paying off your mortgage.
Time Frame
Your credit history will reflect all of your accounts for the last seven years. If you had a bankruptcy in the past 10 years, that will also be reflected. Your credit score takes into account everything that is reported on your credit history. Think of it as a numerical summary of your all your good credit deeds and misdeeds. The credit scoring process includes how recently actions were reported in your credit history. Fair Isaac is the company behind your FICO credit score, which is the score most lenders and one of the three credit reporting bureaus use.
Considerations
How much effect paying off your mortgage will have on your credit score also has to do with what your credit score is at the time you pay it off. If your credit score is already above 700, which is considered very good, any positive things you do to boost your credit score will have minimal impact. Above 760, your credit score is considered excellent, and a smaller positive impact will be felt, perhaps just a few points.
Warning
Paying off your mortgage at the expense of not paying other bills for which you owe money can have a negative impact on your credit score. Just how negative the impact will be depends on your existing credit score, your history with each of your creditors and how long you allow your accounts to lapse before making payment.
Prevention/Solution
Do not consider paying off your mortgage in full unless you have already paid your other outstanding debts, such as credit cards. Many financial experts consider mortgages to be good debt. Good debt is borrowing that enables you to make money over the long term, such as through the appreciation of a home's value. In addition, you can take tax deductions on your mortgage payments--something you cannot do with credit cards.
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