Q. My mortgage is almost paid off, I have a $ 10,000 car loan and a small credit card debt. My credit score is 830. How will paying off the mortgage affect my score? I am also thinking of taking out a Home Equity Line of Credit (HELOC). Should I do this before or after paying off the mortgage?
– Happy owner
A. Paying off a mortgage is celebratory, and congratulations are absolutely in order.
Your high credit score is also admirable.
The score is based on a number of criteria, including the credit mix you have, said Claudia Mott, certified financial planner at Epona Financial Solutions in Basking Ridge.
While your credit mix only makes up a small percentage of your 10 percent credit score, the fact that installment loans and credit cards contribute to the math, she said.
Mott said the most important elements of a credit score – 25 percent payment history and 30 percent due amounts – are the most important factors.
“Without a doubt, you were on time with your payments and didn’t have large credit card balances,” Mott said. “Because a mortgage is an installment loan and is repaid over time, your credit score will not be greatly affected by the repayment if it changes at all.
The fact that you also have an auto loan can actually keep your score from changing because it positively contributes to the credit mix, she said.
Mott said you might want to buy HELOC before you pay off the mortgage.
“Although there shouldn’t be any significant change in your credit score due to pay off your mortgage, going through the application process knowing what your score is can get you the best rates and terms a bank is willing to offer, ”she said. “Credit reports are often pulled when a consumer requests credit and the result can be a reduction in the value of the score, so it’s worth making the most of your large number. “
The HELOC will not be viewed as an installment loan, but rather as a credit card or revolving line of credit, she said. Therefore, as you use HELOC, your credit utilization rate will change. This ratio contributes 30% of your credit score, Mott said, noting that it’s best to keep the ratio well below 30% so that it doesn’t negatively impact your score.
“Maintaining a credit score as high as yours comes from having a long history of on-time payments, your credit usage remains well within acceptable limits, and you have a variety of credits available over the course of your life. life, ”Mott said. “You may want to close a unused credit card to tidy up your financial life, but it will likely impact your credit usage rate, so make sure your usage on other cards is very low.
Once you have made your last mortgage payment, Mott said, it’s a good time to think about how you could use those dollars for a savings goal.
“This is money you didn’t have to spend in the past and which could perhaps be used to bolster your emergency savings fund, retirement account, home improvement project, or home improvement project. other long-term wishlist item, ”she said.
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.com‘s weekly electronic newsletter.