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.
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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.
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