NEW YORK (FOX 5 NY) - A mortgage is one of the things that can improve your credit score over the long term. But what happens to your credit when you first buy a home?
According to a new study from LendingTree, expect a short-term dip. Tendayi Kapfidze, Chief Economist at LendingTree, says when you take out a loan to buy a home, your credit falls for about 4-5 months.
It starts to recover, and gets back to where it originally was, in a little less than a year.
Nationally, LendingTree found that credit scores dropped about 15 points after a home purchase.
In New York, they fell a little more than the national average, about 17 points.
That’s because New Yorkers typically pay more for real estate and are taking on bigger mortgages.
But paying off that mortgage is one of the best ways you can build better credit and wealth over time.
Tendayi says there are a few ways to boost your credit.
First, pay your bills, including your mortgage, on time.
Try not to be late.
That’s one of the worst things you can do in terms of your credit score.
Second, if you have revolving credit, like credit cards, try not to get those balances too high.
That’s called utilization.
So if you have $100 in credit, and you’re using $30 of it, that’s 30% utilization, which is much better than if you’re using $70 of it, which is 70% utilization.
That’s also important before you apply for a mortgage.
Tendayi says your credit score is most useful to you when you’re taking out a mortgage.
That’s the time when you want to be as good as possible.
So avoid taking out smaller debt, whether it’s auto or credit card, right before you’re looking to take out a mortgage.
A higher credit score can save you thousands on your home.
Tendayi says if you have a score of say 680 versus a score of 760, it makes a big difference.
LendingTree found that if you take out a loan of $300,000, that difference in credit scores, over the life of the loan, is a difference of about $20,000 in interest.
And just like you’d shop around for a home, be sure to shop for your mortgage.
Buying a home is the biggest financial transaction many people make in their lives, Tendayi says, and a government study found that only 50% of people speak to more than one mortgage lender.
The more lenders you speak to, the more like you are to get a better rate, he says, because you’re making them compete against each other.
Shopping for a mortgage isn’t as complicated as it sounds.
You can go through a mortgage broker who will do a lot of the work for you, or you can compare rates online.
Tendayi says lenders are even more competitive online, and like most other kinds of shopping, that’s often where you’ll find the best prices.
And remember, even if your credit takes a short-term dip after you buy a home, if you pay your mortgage on time, your credit will likely recover and go even higher in about a year.