Many homeowners dream of the day they pay off their mortgages and become the sole owner of their homes. Like any loan, paying your mortgage affects your credit score, and paying off the mortgage may actually end up lowering your score. However, any negative impact you incur against your credit score will likely be minimal.
Credit Scores
Your credit score is a three-digit number that tells lenders if you represent a risky or sage prospect for a loan. Every time you pay your bills, apply for a new loan or pay down your debt, your credit score may change. People with higher credit scores are considered responsible borrowers, while those with low scores are considered more risky. When companies calculate your credit score, they take all the information on you credit report and use that as the basis for the calculation.
Mortgages
How much each item on your credit report matters differs between companies. In general, there are five key factors that are considered to make up your score: your payment history, how much available credit you use, how many new loans you have, what kind of loans you have and the average length of your loans. A mortgage affects several of these factors, including the variety of loans you have, your payment history and the length of your loans.
Lower Score
When you pay off your mortgage, you finish payments of the installment loan and are no longer responsible for making monthly payments. This transaction gets listed on your credit report and taken into account by the companies that determine credit scores. If your home loan is the only type of installment loan you have, paying off the mortgage may actually lower your score. However, Kiplinger's reports that any negative effect it has will be small and will not seriously impact your score.
Impact
If paying off your mortgage lowers your score, you can easily raise it again. One key credit score, the FICO score tabulated by the Fair Isaacs Corp., counts the variety of loans you have as 10 percent of your score. If by paying off your mortgage you eliminate the only installment loan you have, you can increase your loan variety by taking out a new installment loan, such as a car loan. However, the slight negative impact you may experience by paying off the mortgage is not normally enough in itself to justify taking out a new loan just to raise your score.
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