Does Paying Mortgage Help Improve Credit

Owning a home is a significant financial milestone for many Canadians, and a mortgage from a financial institution is a key step in achieving that goal. But did you know that mortgage payments can also impact your credit score? Whether a first-time buyer or a seasoned homeowner, understanding how your mortgage payments affect your credit is crucial for building and maintaining financial health.

This blog explores the connection between mortgage payments and credit improvement, highlighting the factors that matter most and how you can make the most of your homeownership journey.

How Mortgage Payments Impact Credit Scores

Your mortgage payments play a critical role in shaping your credit score.

1. Payment History: Your payment history is the largest factor influencing your credit score, accounting for 35% of the total. Consistently paying your mortgage on time shows lenders that you’re a reliable borrower, positively affecting your credit profile.

2. Credit Mix: Mortgages are considered installment loans and contribute to a diverse credit mix, which makes up about 10% of your score. A balanced credit portfolio, including installment loans and revolving credit (like credit cards), can boost your score.

3. Loan Amount and Credit Utilization: The size of your mortgage isn’t directly factored into your credit utilization ratio—this is specific to revolving credit accounts. However, large loan balances can affect your perceived creditworthiness, especially if other debts exist.

4. Age of Credit Accounts: Mortgages are long-term loans, and keeping them in good standing over time increases the average age of your credit accounts, which contributes positively to your score.

5. Missed Payments and Defaults: Missed or late mortgage payments can severely impact your credit score. A single missed payment could stay on your credit report for up to seven years, creating a negative mark that’s hard to erase.

Understanding Credit History and Mortgage Payments

Your credit history records how you've managed debt over time, and mortgage payments are a significant part of this picture.

1. Establishing a Strong Credit History: Taking on a mortgage can enhance your credit history by adding a major installment loan to your credit profile. Lenders view a well-maintained mortgage as a sign of financial responsibility, which can boost your credibility.

2. Long-Term Benefits: A mortgage is typically a long-term financial commitment, often spanning 15 to 30 years. Over time, consistently paying your mortgage helps establish a robust credit history, reflecting reliability and stability.

3. Building Positive Credit Habits: Regular, on-time mortgage payments demonstrate to lenders that you can manage substantial financial obligations, contributing positively to your credit score and overall creditworthiness.

4. Impact of Missed Payments on Credit History: A missed mortgage payment can harm your credit history significantly, showing up as a delinquency on your credit report. It can lower your credit score and make future borrowing more challenging.

5. Refinancing and Credit History: If you refinance your mortgage, the original loan is closed, and a new one opens. While this can temporarily affect the length of your credit history, maintaining consistent payments on the new loan helps restore and improve your credit profile over time.

How Mortgage Payments are Reported to Credit Bureaus

Mortgage lenders regularly report your payment activity to Canada’s major credit bureaus, Equifax and TransUnion. It typically happens monthly and includes your payment history and account status.

The information reported includes your original loan amount, current balance, and whether your payments were on time, late, or missed. Consistently paying on time is reflected positively, helping to build a strong credit profile.

If a payment is 30 days or more past due, it’s reported as late and can significantly hurt your credit score. These negative marks stay on your credit report for up to seven years.

When you pay off your mortgage, the account is marked as closed. While this looks good overall, closing the account can slightly reduce the average age of your credit accounts.

It’s also worth noting that not all lenders report to both credit bureaus, and reporting timelines may vary. Regardless, making consistent payments ensures your credit remains in good standing.

Building Credit with Mortgage Payments

Paying your mortgage on time is one of the most effective ways to build credit. Timely mortgage payments are recorded on your credit report, demonstrating reliability and boosting your credit score.

Mortgages contribute to your credit mix, which accounts for about 10% of your score. A mix of credit types, such as a mortgage and credit cards or auto loans, can positively impact your overall credit profile.

A mortgage also adds to the age of your credit accounts. Over time, this helps establish a longer and more robust credit history, another key factor in determining your credit score.

Missed payments, however, can harm your efforts. A single late mortgage payment can significantly lower your score and remain on your credit report for years. Setting up automatic payments or reminders can help ensure consistency.

You can use this significant financial commitment to build and strengthen your credit by maintaining timely payments and managing your mortgage responsibly.

Managing Debt to Improve Credit Scores

Effectively managing your debt is crucial for improving and maintaining a healthy credit score. Here are some strategies to help you manage your debt wisely:

1. Pay on Time: Timely debt payments are the most important factor in your credit score. Set reminders or automate payments to ensure you never miss a due date.

2. Reduce Credit Card Balances: Keep your credit card balances below 30% of your credit limit. High balances relative to your credit limit can negatively impact your score, even if you make timely payments.

3. Consolidate Debt: If you have multiple high-interest debts, consider consolidating them into one loan with a lower interest rate. It can make payments more manageable and reduce the risk of late payments.

4. Avoid Opening Too Many Accounts: Opening several new accounts simultaneously can hurt your score. Each hard inquiry temporarily lowers your credit score.

5. Keep Old Accounts Open: The length of your credit history impacts your score. Keep older accounts open and avoid closing them, even if you no longer use them frequently.

Optimizing Credit for a Mortgage

By optimizing your credit, you can improve your chances of securing a mortgage with favourable terms and save money in the long run.

Check Your Credit Report

Before applying for a mortgage, review your credit report for errors or discrepancies. Disputing inaccuracies can ensure your credit score is as high as possible when you apply, giving you a better chance of securing favorable mortgage terms.

Improve Your Credit Score

Pay down high-interest debt, reduce credit card balances, and avoid opening new credit accounts in the months leading up to your mortgage application. A higher credit score can help you secure a lower interest rate, potentially saving you money over the life of your mortgage debt.

Keep Credit Utilization Low

Aim to use less than 30% of your available credit limit on revolving accounts like credit cards. High credit utilization can lower your score and may make lenders view you as a higher-risk borrower. Reducing balances can have a positive impact on your score.

Build a Solid Payment History

Consistently paying bills on time is essential for building a strong credit history. Even one late payment can significantly hurt your score, so staying on top of your payments can improve your creditworthiness and increase your chances of getting approved.

Save for a Larger Down Payment

A larger down payment can help offset a lower credit score, as it reduces the lender’s risk. It can also help you avoid private mortgage insurance (PMI) and secure better mortgage loan terms, saving you money in the long run.

Avoid Large Purchases Before Closing

Taking on new debt before closing your mortgage can lower your credit score and raise concerns with lenders. Avoid major purchases, like buying a new car, until after you’ve closed on your mortgage to keep your credit score stable.

How Long After Paying Off Debt Will Credit Scores Change?

Your credit score may improve once you pay off a debt, but the timeline can vary depending on several factors.

Immediate Changes

Your credit score may improve quickly, especially if the paid-off debt was a high-interest credit card or loan. Once the lender reports the payment to the credit bureaus, your credit utilization ratio improves, which can immediately boost your score.

Timing of Reporting

Credit reporting agencies typically update your score once they receive information from your creditors. It usually happens within 30 to 45 days of a payment being made. However, this can vary depending on when your lender reports to the bureaus, so you may not see an immediate effect.

Long-Term Impact

While paying off debt improves your credit health, the full impact may take longer. For example, if you paid off a large loan, it may take time for your overall debt-to-income ratio to adjust, and it could take several months to remove any negative marks (such as late payments) from your report.

Credit History Length

If the debt you paid off was one of your oldest accounts, it may reduce the average age of your credit history, which could have a slight negative effect. However, this effect is typically minor compared to the benefits of paying off debt and reducing your overall credit utilization.

Building Stronger Finances with KOHO for a Path to Homeownership

KOHO's spending and saving products offer Canadians powerful tools to improve their financial health and make significant strides toward homeownership. By using KOHO’s products to manage day-to-day expenses, apply for cash advances, track spending, get overdraft protection, and save for a down payment, you can take control of your finances and work towards a more secure financial future.

KOHO's credit-building features, including the ability to monitor your credit score and manage spending, also play a key role in improving your credit profile. Whether saving for a home or looking to strengthen your credit, KOHO’s intuitive platform provides the resources to build credit, save smarter, and eventually secure that dream mortgage with better terms.

With the right financial habits and KOHO’s tools, Canadians can be well on their way to financial strength and homeownership.