What Happens to Your Credit Score if You Pay Off Your Mortgage?

The answer might surprise you.

Carrying a mortgage is something you might easily end up doing for 30 years. Even if you manage to pay off your home early, chances are, you'll have carried that loan for many years before being done with it. A paid-off mortgage is a milestone worth celebrating. But in some cases, paying off a mortgage could actually cause a minor hit to your credit score.

Why paying off a mortgage could hurt your credit score

You'd think that paying off a loan would reflect positively on your credit score, since it shows you're no longer borrowing as much. But in some cases, a small hit to your credit score might ensue when your home gets paid off.

That said, the hit in question should be minor in nature. Your credit score might dip around 10 points or so once your mortgage is paid off, but we're not talking about a massive hit, like the type you'd face if you were to be late with a few mortgage payments.

So why would paying off your home cause your credit score to drop at all? It boils down to the way credit scores are calculated.

There are five factors that go into calculating a credit score:

• Your payment history, which speaks to how timely you are in paying bills
• Your credit utilization ratio, which measures how much of your available revolving credit you're using at once
• The length of your credit history, which shows how long you've had different accounts open
• Your new credit accounts, which shows how many loans and credit cards you've applied for recently
• Your credit mix, which shows what types of loans you have

Of these factors, your payment history and credit utilization ratio carry the most weight. Paying off a mortgage could impact the length of your credit history as well as your credit mix.

If you don't have any long-standing accounts in your name other than your home loan and you pay off your mortgage, which you may have held for decades, that could result in a shorter credit history -- and a little bit of credit score damage. Similarly, if paying off your mortgage leaves you with just credit card accounts in your name, that could reflect poorly on your credit mix (since mortgages are a healthy type of debt to have and credit cards aren't). As such, your score could take a minor hit.

Should you avoid paying off your mortgage early due to credit score concerns?

You may decide not to pay off your home loan early because you have an affordable interest rate on that mortgage and you want to free up your money for other purposes. But if you're able to pay off your home ahead of schedule and think that's the right choice for you, don't let concerns about your credit score stop you.

As mentioned above, any hit to your credit score resulting from a mortgage payoff should be minor. If paying off your mortgage helps you improve your financial situation, it's a move worth making.