No more mysteries about your credit score.
See how your credit score will affect your interest rate on a mortgage loan.
Have you ever seen an ad from a lender promising a low interest rate, but when you applied for the loan the rate was higher? Ever wondered what is the lender up to? Should you shop around for a better deal, or is there a reason for this? While shopping around is certainly a good idea, most people don’t realize just how much their interest rate depends on their credit score. And your score is impacted by not only what’s in your credit report, but also what’s missing from it. Let’s start with the basics. When you apply for a home loan, whether you are refinancing or buying, your lender will look at your credit history as it is reported by the three national credit bureaus: TransUnion, Equifax and Experian. These companies collect data about your open credit lines and watch whether you are paying your bills on time.
Each bureau uses an electronic system to grade you, and assigns you a credit score (known as the FICO score) that ranges from 300 to 850. Your lender will consider the average score between the three bureaus. The higher your score, the better. The trouble is that a seemingly small change in your credit score can result in a significantly higher interest rate. For example, someone with the FICO score of 615 will get an interest rate 0.5% higher than someone who scores 620. And the difference between the scores of 620 and 720 is even more drastic: 1.80%! This is because many lenders offer rates based on the brackets: people who score between 620 and 674 are offered one rate, those between 675 and 699 another. Losing a couple of points could mean falling into a lower bracket, and paying thousands of dollars in higher interest payments. Several factors can negatively impact your FICO score. The most obvious is paying your bills late. A less obvious factor is having high ratio of debt compared to available credit. If you owe $5,000 on your credit cards, and your credit limit is $5,000, your score will be lower than if you owed $2,000 with the same limit of $5,000. And frequent inquires from creditors (applying for lots of credit cards or loans) can also cost you points. Perhaps what can hurt you the most are errors and omissions on your credit report. A creditor reporting a late payment in error can cost you points. Same with having someone else’s bad information on your file. But your creditors failure to report good things about you can lower your score, too! Many people don’t realize that credit reporting is voluntary – it is up to creditors to decide if they will report information about you to the bureaus.
Posted by Scott Patton 