Dear Liz: My wife and I recently paid off our mortgage. We have no other debt. I soon learned from Experian that my FICO score, which had been perfect for some time, had dropped by thirty-one points. What justifies such action, and what do I need to do to bring up my score?.
Answer: Credit scores were never intended to be a measure of anyone’s financial health. Rather, their purpose was to assist lenders in determining the likelihood that a candidate would miss payments on a loan or credit card debt.
It usually improves your credit score to have a variety of credit types, such as revolving accounts like credit cards and installment loans like mortgages. Your scores may have been negatively impacted more than usual because the mortgage was your only installment loan. Advertisement.
Nothing needs to be done if your prior score was “perfect,” or 850 on the FICO scale. You’re getting the best rates and terms once your scores are over roughly 760, so the only advantage to aim for is usually bragging rights.
It’s a common misconception that paying off your mortgage will automatically boost your credit score However, in some cases, the opposite can happen Here’s why:
Credit Mix
Credit scores consider the different types of credit you have, including installment loans (like mortgages) and revolving credit (like credit cards). Having a mix of credit shows lenders that you can responsibly manage different types of debt. If your mortgage was your only installment loan, paying it off could negatively impact your credit mix, leading to a score decrease.
Length of Credit History
Your credit history’s length plays a significant role in your credit score. The longer your credit history, the better. Paying off your mortgage, especially if it was a long-standing account, can shorten your credit history and potentially lower your score
Credit Utilization Ratio
Your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit, is another crucial factor in your credit score. When you pay off your mortgage, your total available credit decreases. If you have other outstanding debt, like credit card balances, your credit utilization ratio might increase, negatively impacting your score.
Other Factors
Other factors can also contribute to a score decrease after paying off your mortgage such as:
- Recent credit inquiries: If you recently applied for new credit, like a car loan or credit card, the inquiries can temporarily lower your score.
- Negative items on your credit report: Even if you pay off your mortgage, other negative items like late payments or collections can still drag down your score.
What to Do if Your Score Drops After Paying Off Your Mortgage
If your credit score drops after paying off your mortgage, don’t panic. There are a few things you can do to improve your score:
- Keep your credit utilization low. Aim to keep your credit card balances below 30% of your total available credit.
- Pay your bills on time. This is the most important factor in your credit score.
- Don’t close unused credit accounts. Closing accounts can shorten your credit history and lower your score.
- Dispute any errors on your credit report. You can get a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) and dispute any errors you find.
- Be patient. It takes time to build good credit, so don’t expect your score to jump back up overnight.
While paying off your mortgage is generally a good financial decision, it’s important to understand that it might not always lead to an immediate credit score increase. By understanding the factors that can affect your score, you can take steps to mitigate any potential negative impact and improve your credit score over time.
Frequently Asked Questions
Why is my credit score important?
Your credit score is a three-digit number that represents your creditworthiness. It’s used by lenders to assess your risk as a borrower and determine the interest rates and terms they offer you for loans and credit cards. A higher credit score generally means you’ll qualify for lower interest rates and better terms.
What is a good credit score?
A good credit score is generally considered to be 670 or higher. Scores above 740 are considered very good, and scores above 800 are considered excellent.
How can I improve my credit score?
There are several things you can do to improve your credit score, including:
- Paying your bills on time
- Keeping your credit utilization low
- Disputing errors on your credit report
- Having a mix of credit
- Keeping your credit accounts open for a long time
Where can I get my credit score?
You can get a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year at AnnualCreditReport.com. You can also purchase your credit score from these bureaus or from other credit monitoring services.
Additional Resources
- Federal Trade Commission (FTC): Credit Scores
- Consumer Financial Protection Bureau (CFPB): Credit Reports and Scores
- Experian
- Equifax
- TransUnion
Disclaimer
I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for any financial decisions or investments.
His new job won’t hurt future Social Security benefits
Dear Liz: My spouse’s work record is the basis for my 67-year-old Social Security survivor’s benefit. At 70, I plan to switch to my own Social Security retirement benefit. I’ve been offered a part-time position with a charity that I’d like to accept. However, I am concerned about how it will affect my Social Security. If I show earned income this year, it will knock off one of my 35 highest-earning years. Every year could be a high-earning year if I continue in this role for as long as I hope to. I’ve offered to do the job for free, but that is not an option for them. My high-earning years are in the $55,000 range, while this job pays maybe $6,000 a year. Am I wrong? Is not working reducing my benefit, and should I switch to my Social Security now?.
The complexity of Social Security can be unexpected, which is why it’s so simple to make bad decisions and misjudge the facts.
“Highest earning” means just that. A year cannot “knock off” a year past unless one makes more money than they did the year before. It is only when you produce more than one of those previous years that the older year is eliminated from the calculation. And if that happens, your benefit would go up, not down. Advertisement.
Thus, accept the job offer, take pleasure in contributing to your community, and let your own benefit grow by 8% annually until it reaches its maximum at age 70.
Refinancing brings tax questions
Dear Liz: I recently refinanced my house and got $9,400 cash back. I also received a $2,400 escrow check from my previous mortgage lender. I want to use this money for home repairs (painting, fireplaces, etc.), but is it taxable? Should I set aside a certain amount to cover those taxes? ).
Answer: You got cash back because you took out a larger loan than the one you previously had. You have to pay that money back, so it’s not taxable income. The escrow check represents a refund of money you’d already paid to the first lender. You don’t get taxed on that, either.
Mortgage rates are at historic lows, so there’s money to be saved there by buying a home now. But when it comes to the home’s sales price, don’t expect a discount because of the economic downturn.