Q. My mortgage is almost paid off, I have a $10,000 car loan and a small amount of debt on a credit card. My credit score is 830. How will the mortgage payoff affect my score? I’m also thinking of taking a home equity line of credit (HELOC). Should I do that before or after I pay off the mortgage? — Happy homeowner
A. Paying off a mortgage is cause for celebration and congratulations are absolutely in order.
Your high credit score is also admirable.
The score is based on a number of criteria, including the mix of credit that you have, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.
Although your mix of credit makes up a small percent of your credit score at 10 percent, having both installment loans and credit cards contribute to the calculation, she said.
Mott said the larger components of a credit score – payment history at 25 percent and amounts owed at 30 percent – are the biggest factors.
“No doubt, you’ve been on time with your payments and haven’t had large credit card balances,” Mott said. “Because a mortgage is an installment loan and is paid off over time, your credit score isn’t going to be greatly impacted by the payoff, if it changes at all.”
The fact that you also have a car loan may actually help your score from changing as it positively contributes to the credit mix, she said.
Mott said you may want to take out the HELOC before you pay off the mortgage.
“Although there shouldn’t be any significant change in your credit score as a result of paying off your mortgage, going through the application process while you know what your score is may allow you to get the best rates and terms a bank is willing to offer,” she said. “Credit reports are often pulled when a consumer applies for credit and the result can be a reduction in the value of the score, so it is worth it to make the most of your great number.”
The HELOC will be not be considered an installment loan, instead is treated more like a credit card or a revolving credit line, she said. As a result, as you use the HELOC, your credit utilization ratio is going to change. This ratio contributes to 30 percent of your credit score, Mott said, noting it’s best to keep the ratio well below 30 percent so it won’t have a detrimental impact on your score.
“Maintaining a credit score as high as yours comes from having a long history of on time payments, keeping your credit usage well within the acceptable limits, having a variety of credit that has occurred over your lifetime,” Mott said. “You may want to close an unused credit card to tidy up your financial life, but this will likely impact your credit utilization ratio, so be sure your usage on other cards is very low.”
Once you’ve made your last mortgage payment, Mott said, it’s a good time to think about how you might use those dollars for a savings goal.
“It’s cash you didn’t have to spend in the past and maybe it could be put towards beefing up your emergency savings fund, a retirement account, home improvement project or other long term wish list item,” she said.
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