A home can improve your credit.
Buying a house can be a big decision on several levels, because of taxes and insurance and potential home repairs, but one area that is often overlooked is how a mortgage will affect your credit score as well as how equity in your home can be used to increase your credit score.
The Facts
Merely owning a house will have no effect on your credit score, but a home loan will. Your credit score is based on your credit history and takes into account how much debt you have, how much and what types of credit you have, late payments, defaulted credits cards and loans and any judgments or bankruptcies. Making timely payments on a mortgage can increase your credit score by creating a positive credit history and giving you a new type of loan.
Considerations
You may see a short-term decrease in your credit score when you take out the loan because you are adding a significant amount of debt, but the decrease should be temporary. If you are never late on your payments and do not allow yourself to get behind, your credit score will gradually increase. On the other hand, if you are late with payments, your credit score will decrease.
Types
Along with a traditional mortgage, there are other types of loans associated with a home, including home-equity loans and home-equity lines of credit. Equity is the amount of your home's value that you have paid for, and it can be accessed through these products.
A home-equity loan is basically a second mortgage, while a home-equity line of credit, or HELOC, is similar to a credit card account in that a certain amount of credit is made available to you and take out -- and pay back -- only what you need.
Both a home-equity loan and a HELOC can raise or lower your score depending you whether you make timely payments.
Significance
The impact of a mortgage, home-equity loan or HELOC on your credit score could be significant. According to Bankrate.com, 35 percent of your credit score is based on your payment history, 30 percent is based on your outstanding debt, 15 percent is based on how long you have had the loan and 10 percent of your credit score is based on the type of loan. All three types of home loans can affect each of those categories.
Warning
The most damaging possibility concerning a loan is if you default and the bank forecloses on the house. In addition to losing your home, your account will be closed in default, and that will stay on your credit report or seven years.