Owning real estate can potentially improve a person’s credit score, but it depends on several factors. Here’s what you need to know:
First, it’s important to understand how credit scores are calculated. The most commonly used credit score model is the FICO score, which ranges from 300 to 850. The higher the score, the better the creditworthiness of the individual. FICO scores are based on five main factors:
- Payment history
- Amount owed
- Length of credit history
- Credit mix
- New credit
Owning real estate can potentially have an impact on several of these factors. Here’s how:
- Payment history: Making on-time mortgage payments can positively impact your payment history, which is the largest factor in calculating your credit score. Consistently paying your mortgage on time can demonstrate to lenders that you’re a responsible borrower and can lead to an increase in your credit score.
- Amount owed: Owning real estate can increase your overall debt load, which can negatively impact this factor. However, if you’re able to keep up with your mortgage payments and manage your other debts responsibly, your credit score can still improve.
- Length of credit history: Owning real estate can positively impact this factor because it can increase the length of your credit history. The longer you’ve had credit accounts open, the better it is for your credit score.
- Credit mix: Having a mix of credit accounts, such as a mortgage, credit cards, and car loans, can positively impact your credit score. Owning real estate can diversify your credit mix and lead to an increase in your credit score.
- New credit: When you apply for a mortgage to purchase real estate, it can temporarily have a negative impact on this factor. However, if you’re approved for the mortgage and make on-time payments, your credit score can improve over time.
It’s important to note that owning real estate is not a guarantee of a good credit score. It’s still crucial to make on-time payments, manage your debts responsibly, and monitor your credit report regularly to ensure accuracy.
In summary, owning real estate can potentially improve your credit score by positively impacting several factors used in calculating credit scores. However, it’s not a guarantee and still requires responsible financial management.