Surprising Things That Can Lower Your Credit Score (Even When You're Doing the Right Thing)

Your credit score plays a major role in buying a home. It affects not only your approval but also the interest rate and loan options available to you.

Many buyers assume that if they are making smart financial decisions, their credit score should automatically improve. However, that is not always the case.

Paying Off a Loan Early

Paying off a loan early is generally a smart financial decision — but it can sometimes cause a slight drop in your credit score. You may lose an active account from your credit profile, your mix of credit accounts may change, and the average age of your credit history may decrease. This does not mean you should avoid paying off debt, but timing matters if you are planning to apply for a mortgage soon.

Closing Credit Card Accounts

Many people believe that once a credit card is paid off, the best next step is to close the account. In reality, this can reduce your total available credit, increase your credit utilization ratio, and shorten your credit history. In most cases, it is better to keep the account open with a low or zero balance.

Accepting a Credit Limit Increase

A credit limit increase can help your score by lowering your credit utilization — but some lenders perform a hard credit inquiry before approving the increase. A hard inquiry can cause a small, temporary drop in your score. Before accepting a limit increase, ask whether it requires a hard or soft credit check.

Cosigning a Loan

When you cosign, the loan becomes part of your credit profile, the debt is included in your overall obligations, and any missed payments will affect your credit. Even if payments are made on time, the added debt can impact your ability to qualify for a mortgage. If you are planning to buy a home, it is usually best to wait before cosigning.

Why This Matters When Buying a Home

When applying for a mortgage, lenders review your overall credit profile — payment history, total debt, credit usage, and stability over time. Even small changes can affect your approval or the loan options available to you.

The key is understanding how these decisions impact your credit and planning accordingly.

FAQ

How long does a hard inquiry affect my credit score? Hard inquiries typically affect your score for about 12 months and remain on your report for 2 years, but the impact is usually small and temporary.

Should I pay off all my debt before applying for a mortgage? Not necessarily. Paying down high-balance credit cards can help your score, but closing accounts or paying off installment loans may not always help. Talk to your loan officer before making major financial changes.

What credit score do I need to buy a home? It depends on the loan type. FHA loans generally require 580+, conventional loans typically 620+, and ITIN loans 660–680. Contact Daisy for a personalized review.