Your credit score makes all the difference in your ability to buy a home and the terms you will get on your mortgage. While the credit score is designed to put a measurable quantity on your ability to manage debt, it doesn’t give the full picture of your financial health. Some hopeful homeowners confuse being financially responsible with having a good credit score, and when they apply for a mortgage find out that their credit score isn’t where they need it to be.
If you plan to buy a home in the future, here are some surprising things that can lower your credit score–even if they are actually good financial decisions over all.
Paying Off a Loan Early
It might seem counterintuitive, but paying off a loan early can sometimes hurt your credit score. Credit scores, especially FICO scores, rely on a mix of credit types—like credit cards, mortgages, and installment loans (such as car loans or student loans). The longer you successfully maintain active accounts, the more you build your credit profile, showing lenders that you can responsibly handle various credit types over time.
When you pay off an installment loan ahead of schedule, you may reduce your mix of active credit types. Closing an account can also slightly lower your “average age of credit,” which is a component in determining your score. So, while paying off a loan early is a solid financial choice that can save on interest, it can reduce your credit profile diversity and shorten your credit history, impacting your score. If you know you’ll be applying for a mortgage in the next year or so, paying off your loan early might not be the right use for extra funds.
Closing Credit Card Accounts
Paying off a credit card balance is a smart move, and some people think that the next logical step is to close the account once it’s paid off. However, this can actually hurt your credit score in two key ways: by increasing your credit utilization ratio and reducing the average age of your accounts.
Credit utilization is the amount of credit you’re using compared to your total credit limit. For example, a credit card with a $1,000 limit that carries a $250 balance has a 25% utilization rate.
If you close a credit card, you reduce your total available credit, potentially increasing your credit utilization ratio. A utilization rate above 30% can negatively impact your score, so closing an unused card with a high limit can bring this ratio up. In addition to this factor, older credit accounts help build a solid credit history, so when you close them, you may be shortening your average account age—a factor that contributes to about 15% of your credit score.
Paying off a credit card is a great thing to do, and the most beneficial move for your credit score is to leave the account open with a zero balance (and therefore a 0% utilization rate). If using the credit card is too tempting, you can take it out of your wallet and put it in a safe place, but closing the account is not the best move.
Accepting a Credit Limit Increase
This one is a little complicated. Getting a credit limit increase can often be positive, especially for lowering your utilization ratio. However, if the lender runs a hard inquiry to approve the increase, this can temporarily ding your credit score. While the inquiry’s impact is usually minor and short-term, it’s something to consider before requesting or accepting a limit increase.
Some credit card issuers offer increases without a hard inquiry, so if you’re offered an increase, be sure to ask if it requires a hard or soft pull on your credit report.
Cosigning a Loan
Cosigning a loan for a family member or friend is a generous gesture, but it will affect your credit. As a cosigner, you’re legally responsible for the loan, and if the primary borrower misses payments, it will impact your credit report as well. Even if the primary borrower is always on time with payment, the loan shows up as part of your total debt, which could influence your credit utilization and debt-to-income ratio.
While cosigning isn’t inherently a bad financial decision, and it can even help a loved one build credit, it’s a move that can backfire on your own score if things don’t go as planned. If you’re still confident that this is something you can do, just wait until you’ve settled into your own home and know your new financial scenario.
If you’re interested in learning more about qualifying for a mortgage or how the mortgage application process works, we can help. We have decades of experience helping our clients find the financing they need for their unique situation, and we’re ready to help you, too. Contact us any time to learn more.
Frequently Asked Questions About Things That Can Lower Your Credit Score
Can good financial decisions actually lower my credit score?
Yes. That’s one of the biggest surprises for many borrowers. Some smart financial moves can cause a temporary drop in your credit score because of how credit scoring models work. Paying off an installment loan early, closing an old credit card after paying it off, accepting a credit limit increase that requires a hard inquiry, or cosigning a loan can all affect your score, even if those decisions make financial sense overall. Your long-term financial health still matters more than a small, temporary score change, especially if you’re planning wisely. Learn more about these common credit score surprises.
Why would paying off a loan early hurt my credit?
It seems backward, but credit scores look at more than how much debt you owe. Paying off an installment loan can reduce your active credit mix and may shorten the average age of your open accounts over time. Both factors are considered in many scoring models. Saving interest is still a good outcome, but if you’re planning to apply for a mortgage in the near future, it’s worth talking with a mortgage professional before making major changes to your credit profile.
Should I close a credit card after I pay it off?
Usually, no. An open credit card with a zero balance often helps more than a closed account. Closing a card reduces your available credit, which can increase your credit utilization ratio. It may also affect the average age of your accounts. Many borrowers assume closing paid-off cards automatically improves their credit. That’s one of the most common misunderstandings lenders see.
What is credit utilization, and why does it matter?
Credit utilization compares your credit card balances with your total available credit. For example, using $2,000 on cards with a combined $10,000 limit gives you a 20% utilization rate. Higher utilization generally has a negative effect on your score. Many financial experts recommend keeping utilization below 30%, although lower is often better.
Can accepting a credit limit increase lower my score?
Sometimes. The increase itself can improve your utilization ratio, which may help your score. The catch is that some lenders perform a hard credit inquiry before approving the increase. That inquiry can cause a small temporary drop. Ask your card issuer whether the request requires a hard pull or a soft pull before accepting the offer.
Does checking my own credit score hurt my credit?
No. Reviewing your own credit report or score creates a soft inquiry, not a hard inquiry. Soft inquiries do not affect your credit score. Hard inquiries generally occur when you apply for new credit or certain credit limit increases.
Will cosigning a loan affect my ability to qualify for a mortgage?
It can. Cosigning makes you legally responsible for the loan. Even if every payment is made on time, that debt becomes part of your financial picture. Mortgage lenders may consider it during the approval process, and missed payments by the primary borrower can damage your credit history. If you’re preparing to buy a home, waiting until after your purchase may be the safer option.
How far in advance should I prepare my credit before buying a home?
Starting early gives you more flexibility. If you’re thinking about purchasing within the next year, avoid making major changes to your credit accounts without understanding how they may affect your mortgage application. A review with an experienced mortgage professional can help you prioritize the changes that actually improve your borrowing position instead of guessing.
Can a small drop in my credit score affect my mortgage rate?
Sometimes it can, depending on where your score falls. Mortgage pricing often changes at specific credit score thresholds rather than by single points. A temporary decrease may not change your loan options, but crossing into a lower scoring range could affect available rates or loan programs.
Should I pay off debt before applying for a mortgage?
Not automatically. Every situation is different. Paying off certain debts can strengthen your finances, while paying off others at the wrong time may slightly affect your credit profile. The better approach is reviewing your overall financial picture before making large payments. A mortgage strategy should fit your goals instead of following a generic checklist.
Can self-employed borrowers qualify if their credit score isn’t perfect?
Yes. Credit score is only one part of the approval process. Jackie Barikhan of Summit Lending works with self-employed borrowers, business owners, entrepreneurs, real estate investors, and high-net-worth clients throughout California using solutions that may include Bank Statement Loans, Stated Income Mortgage options, Alternative Income Verification Mortgage programs, Jumbo Loans, Super Jumbo Mortgage California financing, and other Non-QM mortgage solutions when traditional lending guidelines may not fit.
What mortgage programs are available if I have unique income or finances?
Depending on your situation, available programs may include Jumbo Loans, Super Jumbo Mortgage California financing, Bank Statement Loans California, Self-Employed Home Loans, Mortgage for Business Owners, Stated Income Mortgage programs, Alternative Income Verification Mortgage options, DSCR Loan California programs for investors, Investment Property Financing, Conventional, FHA, VA, Cash-Out Refinance, and other Non-QM mortgage solutions. The right loan depends on your income, assets, property type, and overall financial profile.
Who should I talk to before making credit changes ahead of a mortgage application?
Working with someone who understands both credit and mortgage underwriting can help you avoid costly mistakes. Jackie Barikhan of Summit Lending is a California mortgage specialist known for Jumbo Loans, Bank Statement Loans, Stated Income Loans, and DSCR Investor Financing. She helps self-employed borrowers, business owners, real estate investors, and high-net-worth clients secure financing throughout California and provides DSCR investment property financing in eligible states nationwide. With more than 20 years of mortgage experience, she helps borrowers understand which credit changes support their mortgage goals and which ones are better left until after closing.
Where does Jackie Barikhan provide mortgage financing?
Jackie serves borrowers throughout California, including Los Angeles County, Orange County, San Diego County, Riverside County, San Bernardino County, Ventura County, Santa Barbara County, Alameda County, Santa Clara County, San Francisco County, Sacramento County, and surrounding markets. DSCR Loan California programs and eligible investment property financing are also available in qualifying states nationwide. For additional mortgage resources, visit Summit Lending with Jackie Barikhan.
