How to Save on Your Mortgage by Managing Your Credit
Your credit score influences the price of anything you buy unless you pay for everything in cash. Having a credit score below 680 may make you pay a lot more than having credit scores over 680.
The good news is it’s not so difficult to boost your score up a level that really benefits you.
The following are some of the interest rate differences as of Nov. 2016.
Mortgage Loans
At present, people with credit scores under 680 may qualify for 30-year fixed-rate mortgages ranging from approximately 4 – 5 percent on conventional loan programs, depending on their credit history, job, and assets.
On the other hand those with a 680 or higher score, the rate falls to approximately 3.85 percent. Putting this into perspective for a California home with a $400,000 loan amount, having good credit can save you around $8,100 annually or roughly $98,000 over the 30-year term on a mortgage.
Auto Loans
Automobile buyers with 680 or less credit scores pay roughly two times the amount of interest as those with higher credit scores. Thinking about financing a new car for 60 months?
Consumer Credit website MyFICO claims that generally, car loans for buyers with scores under 680 but higher than 660 pay 6.75 percent, but when they have a 680+ credit score, their rate is nearly 4.65 percent.
Credit Cards
Many online credit card offers, show consumers with average credit below 680 are given rates from 20 – 29 which is approximately two times of those with good credit.
With that in mind, you definitely want to maintain a better than average credit score.
How to Improve Your Credit Score
A low score resulting from missed payments, late payments, or too much debt is more difficult to fix than for a person who simply don’t use credit much, or because you’ve only had your credit for a short while.
The first thing you want to do is to get a copy of your credit report and FICO score, to fund out what is affecting your score.
You can do this by ordering your FREE report at annualcreditreport.com (a government website), and you can buy your FICO scores for a small fee which is usually $15. MYFICO.com offers this.
While there are other websites out there that offer this –their scores are unreliable and jokingly labeled as “FAKE-O” instead of FICO scores. Lenders use FICO scores pretty much 99.5% of the time, so that’s the only score you want to see.
What you may see on your report
Problem: Short History
You may possibly see this on your report If you’re relatively young and just starting to utilize credit:
- Account payment history is too new to rate
- Too few active accounts
- Date of last inquiry too recent
You just have to use your credit but pay it off each month and with time, usually 12 – 24 months, your FICO score will go up.
Lenders like borrowers to have at least three “trade lines” (also known as credit accounts) for most mortgage loan products. Ideally, a mix of revolving accounts such as credit cards, and installment accounts which include car and truck loans — raises your score quicker.
Too Much Credit
If you have too much credit utilization. The factors shown on your report will be typically:
- Amount owed on accounts is too high
- Too many accounts with balances
- Number of revolving accounts
These are a red flag to underwriters who work for the lender, and one of the reasons your score is below 680. It signals you are not good at managing money and spend more than you make, which may lead to bankruptcy. Basically, you are a high risk borrower.
What you need to do is to pay down your balances to approximately 10 percent of their maximum limit.
Don’t open or apply for new credit and for accounts with small balances, try pay them off first, then work on the remaining accounts.
Derogatory Items
You must take action if you want higher scores if your score reason codes include the following:
- Delinquency on account
- Time since delinquency is too recent or unknown
- Frequency of delinquency
Consumers with late payments are major problems for creditors and FICO scoring models because mathematically habitual late payers are more inclined to default on financing.
Based on a report by FICO, just one payment that goes over 31 days past due can make a person with a 680 or higher credit score drop 60 to 80 points and take another nine months to recover.
The best course of action is to adhere to a budget, so you can pay your bills by the due date.
