Is Paying Off the Mortgage Good for Our Credit?
See how your FICO score responds to homeowner debt.
By Joan Goldwasser, Senior Reporter
From Kiplinger's Personal Finance magazine, October 2008
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Q: Given the stock market's volatility, low interest rates and little mortgage interest to itemize on our tax return, we were thinking that paying off our loan might be a good investment. But how would it affect our credit score?
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The FICO credit score predicts future credit risk. So although you may take satisfaction in burning your mortgage, you won't receive a bonus for your accomplishment. Craig Watts, a spokesman for Fair Isaac, the firm that created the widely used score, says that your credit score will likely be unaffected. If your mortgage is your only installment loan, however, your score could suffer a slight ding, although not enough to make you want to change your plans.
An installment loan, such as a mortgage or car loan, can boost your credit score (assuming that your payment history is good) because it improves your mix of credit, and demonstrating your ability to manage different types of credit is always a plus. However, "types of credit used" is only one of five categories used in computing a FICO score and is given only a 10% weighting.
The category includes other elements that do not fit in elsewhere, such as student loans, so eliminating one installment loan usually has a minimal effect. Your history of on-time mortgage payments over 15 to 30 years -- which constitutes 35% of your score -- should outweigh any downside risk.
Reader Comments (5)
Posted by: gkajrys at 09/10/2008 01:31:31 AM
If you mortgage is paid off what do you care about your credit score?? You are way ahead of the game.
Posted by: senjy at 09/12/2008 02:26:13 PM
FICO score is a big fraud, why in God's name do you want me to have debts so that I can have good credit? not just debt, I must have mortgage, credit card, car loans etc so that I can have good mix of credit. This is a big fraud. No matter how much you try, the consumers will always be at the losing end...
Posted by: GmHR at 09/13/2008 06:55:29 PM
Here's a thought! Why should you worry about an arbitrary number that means absolutely nothing unless you require credit? Once upon a time you required a loan to purchase your home, now you and your family are fortunate enough to pay the loan back in full. Forget about your FICO score. Quit paying interest on a loan you no longer need and bank the savings. Go on a long awaited vacation, start a college savings fund for your children, put some extra cash in you and your spouse’s retirement fund. The point you have totally missed is the best time to invest your money is when the market is down. Good Luck and God Bless
Posted by: Tom McDonald at 10/04/2008 05:44:10 AM
The recent market activity has comvinced me to pay off my mortgage and be debt free...what are the tax consequences of not having that real estate deduction?...any thoughts, please?
Posted by: Jeff Mercure at 10/08/2008 12:08:24 PM
Yes, you will save money on your taxes, but let's face it and be blunt: Interest payments are not an investment. You get (at a 35% tax rate) only $0.35 return on 'investment' for every $1 you pay in interest. That makes poor investement strategy. Why not consider interest as a major cost, and do what you can to eliminate that cost...