Reducing debt should raise your credit score because it shows fiscal responsibility, but paying down a mortgage does not always make the most financial sense nor help your credit score. Mortgages, for instance, usually carry the lowest interest rate of all kinds of debt. Your other debt obligations and credit history determine what happens after paying down a mortgage.
Misconception
If you have more than one installment loan, paying off your mortgage should raise your score slightly, according to Kiplinger. Consumers who only have one installment loan -- their mortgage -- could see a dip in their credit score, because the FICO score model does not differentiate between a paid-off installment loan and never having had one.
Considerations
Overall, paying off a mortgage probably results in a net gain to your credit score if you have had years of prompt payments, according to Kiplinger. Payment history constitutes 35 percent of your FICO score. Ten percent of your score comes from using several types of credit; this is why eliminating installment loans lowers your score.
VantageScore
In 2006, the major credit rating agencies completed development on the VantageScore formula, which takes into account consumer trends and more demographics, such as people getting older and paying off large loans. While paying off a mortgage may help under the VantageScore model, as of 2010, lenders tend to stick with the FICO score.
Tip
If you have the choice between paying off more than the monthly installment amount on your mortgage and another loan with a higher interest rate, pay off the loan with the highest interest rate first, according to MSN Money Central. Credit cards, for example, typically have the highest interest rate -- most more than 10 percent. Also, the FICO formula puts more emphasis on paying off revolving loans than installment loans.
0 comments:
Post a Comment