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If you’ve recently paid off your mortgage, you’re probably feeling a huge sense of relief. It can be rewarding to pull a copy of your credit report after making that final payment and see that your home loan now shows a balance of zero.
While you may be expecting a significant boost to your credit score as a result of paying down your mortgage, you’ll probably find that the three-digit score, which is used by lenders to assess your risk as a borrower, experiences minimal change.
The relationship between a paid-off mortgage and your credit score
Your credit score, which is calculated based on the information in your credit report, is a moving target. It changes constantly as lenders, collection agencies, and public records report new data that is then listed in your credit report. Your credit scores are updated each time there is a request for a score, and new information received impacts the model.
Additionally, each credit reporting agency has its own model for evaluating your information and assigning you a credit score, so your credit scores will likely vary between the agencies.
As a result, it’s difficult to determine exactly how one credit behavior or piece of credit activity affects your credit score. Taking out a mortgage can have a positive impact on your credit score because it builds up your mix of credit. However, paying off your mortgage won’t have a strong, positive impact, mainly because an installment loan—which is repaid over a designated period of time with a set number of scheduled payments—doesn’t lower your score to begin with.
This means that your credit score likely won’t experience huge gains when you finish paying off your loan, but you probably won’t see a noteworthy drop in points, either.
There’s a chance that if your mortgage is your only installment loan, paying it off could have a slight negative impact on your credit score, but the impact would likely be minor. If you consistently make your mortgage payments on time throughout the life of your loan, that positive payment behavior, which is the largest factor used to determine your credit score, could offset any credit score drop you may experience once you’ve paid it in full.
If you do notice a significant change to your credit score after you’ve paid off your mortgage, it could be the result of other credit activity that is listed on your credit report. If you’ve recently missed a payment, applied for new credit, or racked up high balances on your credit cards, for example, you may notice a drop in your score.
It’s important to remember that mortgages (and other installment loans) can help you improve your creditworthiness as long as you continue to make on-time payments. Making on-time payments on your credit cards, and keeping those balances low, could also help to boost your credit score over time.
Additionally, having your mortgage on your credit report, even after it’s been paid off, can help both your mix of credit and the length of your credit history. The loan could stay on your credit report and continue to factor into your credit score for up to 10 years from the date of last activity.
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