If you’re a prospective homebuyer, you already know how important your credit score is. All lenders use this metric (among others) to help determine your interest rate. Let’s take a deeper dive into why your credit score matters.
Credit scores range from 300 to 850, and that number is used to indicate your creditworthiness. A higher score tells lenders that you have managed your existing debt successfully, and you are less likely to default on your mortgage loan. The reward for this is a lower mortgage interest rate. Even though a high credit score is considered more favorable for lenders, it’s still possible to get a mortgage loan with less-than-ideal credit, but it’s going to cost you. Let’s take a real-world look.
In the following chart I’ve plotted the average 30-year mortgage interest rates for FICO scores above 740 and below 680. As of December 14th, the average rate for 740+ credit scores was 6.177%. For borrowers with scores below 680, their average interest rate increases to 6.674%. — basically 1/2% higher.
Now let’s crunch some numbers. In the following example I’m comparing a $300,000 mortgage loan at 6.177% vs. 6.674%. This is a conventional 30-year fixed rate loan comparison.
As you can see, the lower-credit-scoring borrowers are paying more per month ($97.73 more) and more cumulative interest over the life of the loan ($35,183.17 more interest) 👀
You’ve probably heard me stress the importance of getting a mortgage pre-qualification before you start shopping. Nobody likes unpleasant surprises and your credit score can make a huge difference in what you ultimately pay for your new home. This is just one reason why starting the pre-qualification process early can save you time, money, and frustration. 👍
Here are some general tips for improving your credit scores:
✔ Pay down existing debt (especially credit cards). When you pay down your balances, you improve your credit utilization ratio and this helps to increase your score. DO NOT close your credit card accounts. It’s ok to have credit cards, especially if they are used and paid down often.
✔ Pay your bills on time. 30, 60, and 90+ day late payments are reported to the credit bureaus and noted on your report. This can hurt your score. Keep in mind, we’re not just talking about credit cards and installment loans. Utility, Cell Phone, and Cable Companies can also report “lates” to the credit bureaus.
✔ Don’t apply for new credit or take out new installment loans if you’re considering shopping for a home. Each time you apply for credit, a “hard inquiry” will be generated. Too many inquiries will drag down your score. Adding new installment loans will dent your credit utilization ratio and hurt your score as well.
✔ Download a free credit reporting app like Credit Karma. While these “apps” are not the same as a genuine credit report from the bureaus (Trans Union, Experian & Equifax), it will allow you to stay on top of your credit profile.
