Buyers’ credit scores bounce back after 1 year
CHARLOTTE, N.C. – Nov. 2, 2018 – LendingTree released a study on how a home purchase affects credit scores. The analysis looked at more than 5,000 consumers who took out a mortgage and tracked their credit scores changed in the months that followed.
In general, credit scores after a purchase fall for about five months and then rise for about five-and-a-half months before bottoming out and then bouncing back. It takes almost a full year for credit scores to return to pre-transaction levels.
In a ranking of 50 U.S. cities, Miami (No. 13) buyers saw credit scores return in the least amount of time – 300 days. Jacksonville (No. 34) buyers saw their full credit score return at the slowest pace – 332 days.
"A house is the biggest purchase most people make in their lifetime, with the accompanying mortgage being their largest financial transaction," says Tendayi Kapfidze, chief economist at LendingTree. "Most people know they should work toward having the best possible credit score before applying for a mortgage, as an applicant's credit score can significantly affect the amount and cost of borrowing – but what happens to your credit score after you get a mortgage?"
- Scores fall for at least four months. On average, credit scores fell by 15 points and took 160 days (just over five months) to reach their low points. Mortgages do not appear immediately. Typically, the lender starts reporting to the credit bureaus after the first payment and, depending on the lender's reporting cycle, it may take 60 days after closing or even longer for it to show up and start affecting a score.
- Recovery takes at least another five months. It took an average of 161 days for credit scores to bounce back as borrowers make on-time payments.
- Eleven months later, scores recover and are poised to move higher. The average for the complete decline and recovery cycle after a transaction was 11 months nationally.
- Tight range of score declines. The average score fell the most in Virginia Beach, Va., down 20 points, and the least in Minneapolis at just 11 points. However, some individual's credit scores in the study sample dropped as much as 40 points.
Florida cities in the study
In Miami, buyers started the process with an average credit score of 711. Over the next 145 days, that score dropped an average 16 points, and it took another 154 days for it to bounce back. Total time for the post-purchase credit score cycle: 300 days.
In Tampa, buyers started the process with an average credit score of 692. Over the next 159 days, that score dropped an average 13 points, and it took another 145 days for it to bounce back. Total time for the post-purchase credit score cycle: 304 days.
In Orlando, buyers started the process with an average credit score of 694. Over the next 153 days, that score dropped an average 13 points, and it took another 161 days for it to bounce back. Total time for the post-purchase credit score cycle: 314 days.
In Jacksonville, buyers started the process with an average credit score of 692. Over the next 162 days, that score dropped an average 15 points, and it took another 170 days for it to bounce back. Total time for the post-purchase credit score cycle: 332 days.
Why new mortgages affect credit scores
When consumers take out a mortgage, a large balance is added to their credit report. Credit scoring models consider a consumer's total balance of money owed, and a large increase in outstanding debt drives scores lower. The presence of a new credit line item also weighs on the score, though to a lower extent.
As time passes, making on-time payments helps a borrower improve their credit score as they demonstrate they are managing their new mortgage account well. Having a mortgage also increases the diversity of accounts in the credit file, which also boosts the score. Eventually, the score returns to its pre-mortgage level and, in most cases, surpasses it.
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