Dick Stoner's Blog
Everyone knows that their credit score will affect the mortgage they qualify for and the interest rate they receive. The details of how exactly those numbers are arrived at, however, are a bit hazy for the average prospective homeowner.
This confusion is due to a number of reasons. Chief among them is the fact that your average person isn’t well-versed in credit terminology or the variables that go into determining their credit scores.
In this article, I’m going to break down credit scores and credit bureaus, then discuss how each of them affects the mortgage rate you could receive. Then, we’ll talk about some ways you can boost your score to qualify for a better rate.
Anatomy of a credit score
Credit scores are determined by five main variables. In order of importance, they are:
35%: your payment history on loans, bills, credit cards, etc.
30%: your total debt amount for all of your accounts
15%: length of your credit history (how long you’ve had open accounts for loans, credit cards, etc.)
10%: types of credit you have used (auto loan, student loan, credit card… diversity of loans matters)
10%: recent credit inquiries (such as taking out new loans or opening new credit cards)
To have a “good” (over 700) or “excellent” (over 750) credit score, you’ll need to focus on each of these factors. For most people, paying their bills on time over a long enough timeline is enough to get them into the excellent range.
But things happen in life. People forget to pay an important bill, they have financial emergencies, or they have to take out a loan for an unforeseeable expense.
The credit bureaus
So, who are the people that determine your credit score?
There are three main credit bureaus: Experian, TransUnion, and Equifax. Lenders will look at reports from all three bureaus to determine your rate. Due to the Fair and Accurate Credit Transactions Act of 2003, consumers are able to receive a free copy of their credit report from each bureau once per year.
Since then, companies like Credit Karma have made credit reports even more accessible. Users are able to check in on their credit as often as they want free of charge.
Since much of your credit score is out of your hands, at least in the short-term, what can you do to help boost your score over the next few months to increase your chances of getting a good interest rate on your loan? Two things.
Credit and mortgages
So, just how much of an impact does your credit score have on your mortgage rate? Having an excellent score can give you a full percentage point lower on your monthly interest rate.
One percent doesn’t seem like much, but over the period of a 30-year loan that can amount to tens of thousands of dollars that you could have saved if you had a better credit score. As you can imagine, having an extra $2,000 per year can be quite helpful to a new homeowner.
So, what can you do to boost your score?
Since you have access to free credit reports be sure to go through your detailed report a few months before you plan to apply for a mortgage. Report any harmful errors to help you increase your score.
Don’t apply for new credit
The period from now until you apply for a mortgage is an important one. If you make new credit inquiries (i.e., open up new credit cards, take out new loans, etc.), your score will temporarily decrease. Wait until after you sign on your mortgage to take out other loans.