Here’s how buying a house affects your credit score

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A house is the biggest purchase most people make in their lifetime, with the accompanying mortgage being their largest financial transaction. Most people know that they should work toward having the best possible credit score before applying for a mortgage, as an applicant’s credit score can significantly affect the mortgage’s amount and borrowing cost.

 But what happens to your credit score after you get a mortgage? 

A new analysis looked at more than 5,000 consumers who took out a mortgage and how their credit scores changed in the months following. 

Our study shows that scores initially fall, but eventually recover.

Key Findings

  • Scores fall for at least 4 months. On average, credit scores fell by 15 points and took 160 days (just over five months) to reach their low points. Mortgages do not appear on credit reports immediately after closing. Typically, the mortgage lender starts reporting to the credit bureaus after your first payment (depending on the lender’s reporting cycle). Therefore, it may take about 60 days after closing (or even longer) for it show up and start affecting a score. New Orleans homeowners, for example, saw their credit scores reach their lowest points in an average time of 133 days, while Milwaukee home buyers’ scores had the longest decline: 191 days. 
  • Recovery takes at least another 5 months. It took an average of 161 additional days for scores to return to their prior levels. As borrowers make payments on time, their credit scores start to recover. In Richmond, Virginia, buyers’ credit scores rebounded fastest at 130 days, while the upward climb for homeowners in Austin, Texas lasted 197 days. 
  • 11 months later, scores recover and are poised to move higher. The national average for the complete decline and recovery cycle was 11 months. Richmond home buyers saw their credit scores go through the cycle the fastest (nine months) while the dip and return of Milwaukee buyers’ scores took the longest (13 months). 
  • Tight range of score declines. The average score fell the most in Virginia Beach, Virginia (down 20 points), and the least in Minneapolis at just 11 points. Individual credit scores in the sample declined by as much as 40 points.

Why new mortgages affect credit scores

When a consumer takes out a mortgage, a large balance is added to his credit report. Credit scoring models consider a consumer’s total balance of money owed, and a large increase in outstanding debt drives scores lower. The presence of a new credit line item also weighs on the score, though to a lower extent. 

As time passes, making on-time payments helps a borrower improve their credit score as they demonstrate that they are managing their new mortgage account well. Having a mortgage also increases the diversity of accounts in the credit file, which also boosts the score. Eventually, the score returns to its pre-mortgage level and, in most cases, surpasses it. 

As well as national data, we took a look at the variation in credit scores across the 50 largest cities in the U.S. These aggregate numbers give an excellent view of the effects buying a home can have on credit scores. We used data from My LendingTree.

Cities with the fastest credit score recovery after getting a mortgage

1. Richmond, Virginia

  • Average initial credit score: 693
  • Average decline in score: 13
  • Total time until recovery: 266 days

2. Minneapolis

  • Average initial credit score: 701
  • Average decline in score: 11
  • Total time until recovery: 267 days

3. Salt Lake City

  • Average initial credit score: 704
  • Average decline in score: 15
  • Total time until recovery: 272 days

Cities with the slowest credit score recovery after getting a mortgage

48. Riverside, California

  • Average initial credit score: 685 
  • Average decline in score: 17 
  • Total time until recovery: 375 days

49. Austin

  • Average initial credit score: 687 
  • Average decline in score: 15 
  • Total time until recovery: 377 days

50. Milwaukee

  • Average initial credit score: 700 
  • Average decline in score: 11 
  • Total time until recovery: 384 days

50 largest cities ranked by time for credit score to recover

Rank

Metro

Average Initial Score

Average Decline in Score

Average Days in Decline

Average Days to Recover

Total Days

1.

Richmond, Virginia

693

-13

136

130

266

2.

Minneapolis

701

-11

136

131

267

3.

Salt Lake City

704

-15

139

132

272

4.

Providence, Rhode Island

691

-12

139

136

275

5.

New Orleans

686

-13

133

147

280

6.

Houston

688

-15

147

136

284

7.

Cleveland

699

-13

145

140

285

8.

Columbus, Ohio

697

-12

142

149

291

9.

Cincinnati

694

-19

154

141

294

10.

St. Louis

711

-15

143

151

295

11.

Philadelphia

701

-17

161

136

297

12.

Detroit

695

-14

144

153

297

13.

Miami

711

-16

145

154

300

14.

Tampa, Florida

692

-13

159

145

304

15.

Oklahoma City

678

-19

148

156

304

16.

Birmingham, Alabama

671

-15

145

160

305

17.

Buffalo, New York

705

-15

165

146

311

18.

Boston

714

-15

157

155

312

19.

Portland, Oregon

704

-14

158

156

314

20.

Hartford, Connecticut

695

-14

166

148

314

21.

Orlando, Florida

694

-13

153

161

314

22.

New York City

710

-17

156

159

315

23.

Las Vegas

682

-15

165

153

317

24.

Denver

708

-17

168

150

318

25.

Memphis, Tennessee

675

-13

187

132

319

26.

San Jose, California

725

-14

149

173

322

27.

Indianapolis

690

-14

158

164

323

28.

Atlanta

684

-16

158

165

323

29.

Charlotte, North Carolina

703

-14

160

165

325

30.

San Antonio

668

-15

166

161

327

31.

Kansas City, Missouri

698

-13

169

159

328

32.

Washington

701

-14

159

171

330

33.

Louisville, Kentucky

691

-14

157

175

332

34.

Jacksonville, Florida

692

-15

162

170

332

35.

Chicago

695

-18

163

171

335

36.

Baltimore

695

-15

170

167

337

37.

Pittsburgh

695

-17

169

169

338

38.

Nashville, Tennessee

697

-15

165

181

346

39.

Los Angeles

713

-15

172

175

347

40.

San Diego

710

-14

175

173

348

41.

Phoenix

686

-16

175

175

350

42.

Seattle

708

-15

174

178

351

43.

Dallas

690

-13

173

183

356

44.

Sacramento, California

701

-16

164

193

357

45.

Virginia Beach, Virginia

683

-20

183

175

358

46.

Raleigh, North Carolina

697

-16

180

184

363

47.

San Francisco

724

-13

179

196

375

48.

Riverside, California

685

-17

180

195

375

49.

Austin, Texas

687

-15

179

197

377

50.

Milwaukee

700

-11

191

193

384

Improving your credit score after buying a home

There’s nothing you can do about the effect your new mortgage will have on your credit score, but you can focus on other areas of your credit profile to make sure that your score doesn’t fall further. Avoid applying for new credit and keep your credit card balances low. This could be a challenge — you’ll have moving expenses and a new house to furnish — but using as little of your available credit as possible is key to improving your credit score. The closer you get to maxing out your credit cards, the more your credit score will drop. Of course, ensure that you also make on-time payments on all of your debts.

Methodology

To determine how buying a home affects credit score, we used LendingTree’s proprietary financial intelligence platform, My LendingTree, to look at over 5,000 consumers who bought homes in 2015 and 2016. My LendingTree tracked credit scores from when borrowers took out a mortgage until the score returned to its pre-mortgage level, and aggregated for each city. Our definition of cities is from the Census Bureau’s Core-Based Statistical Area (CBSA) boundaries.

This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.

Featured Image Credit: DepositPhotos.com.

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