New Homeowners Face Credit Pitfalls
Homebuyers often spend considerable effort padding and polishing their credit in the lead-up to the big purchase. Locking down a home loan today is no small feat, even as credit requirements continue to thaw. But the relief that comes with finalizing a home purchase can also spur a false sense of security.
It's easy for the financial diligence and dedication of the loan approval process to disappear the further you get from the closing table. New homeowners can't let their guard down when it comes to their credit profile. Here's a look at four common credit mistakes new homeowners make.
1. Misunderstanding Immediate Impacts. Having a home and a history of on-time mortgage payments can help strengthen your credit profile. Not just anyone can qualify for a home loan. That signpost, coupled with a responsible payment history, can do wonders for your credit score. A%VIRTUAL-pullquote-It's not uncommon for new homeowners to go wild on furniture and furnishings to celebrate.% mortgage also helps diversify your credit history, which is also a factor in most credit scoring formulas.
But don't expect your credit score to soar right after you close on your loan. In fact, your credit might actually drop in the months following your home purchase. You're adding a sizable new credit account and have yet to establish a track record of timely payments. Using credit wisely and making on-time mortgage payments should help you regain any lost points within six months.
2. Racking Up New Credit. Taking on new credit before your loan closes can absolutely tank your home purchase. But racking up a bunch of new debt afterward isn't a great idea, either. It's not uncommon for new homeowners to go wild on furniture and furnishings to celebrate.
The new mortgage means your score is already likely to dip in the short term. Piling on additional debt can cause an even steeper drop. Your debt load accounts for nearly a third of your credit score.
But new credit accounts also play a role in that calculation. Opening several new trade lines in a short period can signal big-time risk, especially for consumers without a strong credit history. Furniture and home improvement store charges on the heels of a mortgage can damage your credit profile. Moderation and common sense are key.
3. Putting Credit on Autopilot. It's human nature to only think about your credit profile in preparation for taking on major credit like a mortgage. New homeowners often allow their credit to slink back into the shadows once they've crossed the threshold of their new home.
Don't let your credit profile fall off the radar. Stay on top of your credit using services such as AnnualCreditReport.com, which allows consumers to access their credit reports from each of the three major credit bureaus for free once a year. (You can also check your credit scores for free every month at Credit.com.)
4. Underestimating Late Home Payments. Your lender might tack on additional fees if your mortgage payment is a couple weeks late, but creditors typically report late payments beginning at 30 days (and then again at 60, 90, 120 and 150 days). Having just one 30-day late payment can devastate your credit score.
How big of a hit depends in part on what kind of credit you have. A study by credit score firm FICO shows that one 30-day late payment can cause a drop of anywhere from 60 to 110 points. It can take homeowners anywhere from nine months to three years to see their scores recover.
Default and foreclosure often generate the most attention, but new homeowners need to understand that even a single misstep with their mortgage can have long-lasting consequences for their credit.