By: Gwen Moran
Published: October 22, 2010
How you manage your home ownership finances affects your credit score—and your ability to refinance later.
1. Postpone that refinance until your credit is squeaky clean
Even a small blemish on a credit report can cost you at closing. Money expert Denise Winston found that out firsthand: Her husband hadn’t paid a $40 pager charge. The unpaid bill was turned over to a collection agency and ended up damaging his credit score.
Because of that one small unpaid bill, the interest rate on the couple’s mortgage was 0.25% higher than if he'd had a clean score. Put another way, that’s $13,000 over the life of the loan.
The lesson? Even small items can damage your financial position. Get your credit report beforehand to see if there’s anything damaging. If so, consider postponing a refinance or HELOC (home equity line of credit) until small but potentially costly dings fade over time.
2. Pay your mortgage—now
Not all late payments are created equal: Almost nothing hits your credit score harder than a late mortgage payment. Payment history generally accounts for 35% of your credit score, which is bad enough, but credit score agencies consider late home payments graver than late credit card or car loan payments.
In fact, credit score agency VantageScore will knock off more than 100 points beyond what it would do for delinquent auto loans or credit cards.
But if you think you can improve your credit score with early payments, think again. Geoff Williams, co-author of Living Well with Bad Credit, says it may make a slightly positive impression on today’s risk-averse lender, but it won’t make a big difference in getting future credit.
3. Cool it on second mortgages and HELOCs
Drawing down a second mortgage or HELOC can have a negative impact on your credit score because 30% of your credit score is based on how much you owe to creditors. However, if you pay the loan on time, it will have less of an impact, says Winston.
Also, you can mitigate the credit score damage of a HELOC by staying within 30% of the limit.
4. Protect your mortgage to protect your insurance rates
Late payments on your mortgage may also affect your home owners and automobile insurance rates, potentially costing you hundreds of dollars a year, says Williams. Insurers may assume that if you’re strapped for cash and pay your bills late, you’re more likely to file a claim because you need the money.
5. Pay your utility bills and property taxes on time
If you're late on your utility bills and your account is assigned to a collection agency, that agency may report it, causing a drop in your credit score, says Winston. The good news is that utility companies often don’t bother to report late bills to credit bureaus until your delinquency becomes serious.
Interestingly, late payment of property taxes won’t affect your credit score unless you find yourself with a lien on your property. Since liens are public records, they may appear on your credit report and might cause a drop in your credit score.
6. Refinancing? Beware of taking out equity, too
Refinancing your home generally won’t have an impact on your credit score as long as you continue to pay your loan on time, says Williams. However, if you extract equity in the deal, you could marginally affect your credit score because the amount you owe will increase.
Gwen Moran is a freelance business and finance writer from the Jersey shore. She’s the co-author of The Complete Idiot’s Guide to Business Plans and writes frequently about real estate.
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