If you’ve seen the charts or used a mortgage calculator, you know how big of a deal interest rates are to not just your monthly payment but even more your total payoff amount. Rates going up one or two percentage points can cost you thousands and thousands of dollars. Well, one of the factors affecting interest rates is a credit score. Considering it’s also a determining factor in whether the loan is received or not, how much you pay in total interest, and how long the term is, there’s no question that your credit matters.
So what is a credit score and how will it affect me?
A credit score is a number given (between 300 to 850) that measures your trustworthiness as a borrower (or in some cases as a renter or employee.) Your history of making payments on time or how much debt you are carrying are significant indicators of your likelihood to make your payments in the future. Obviously, the lender doesn’t want to loan you the money if you are not going to pay it back, so the credit score quantifies the risk and allows the lender to hedge their risk by either denying the loan, increasing the interest on the loan, requiring a larger down payment, or applying other legal means to compensate. Here are some data points and their approximate weighting that go into the formula that creates the score:
- History of making payments on time (weighted at 35 percent)
- Total debt amount and compared to income (30 percent)
- Length of credit history (15 percent)
- Number of credit holders and what types of credit (various)
- Recent credit (various)
It’s also true that companies or institutions may have their own scoring system. Your anticipated total debt, total income/assets, down payment, credit history with that company, comparison to other borrowers, and some other rare factors are all considerations legally available to the lender.
What are some quick ways to boost my credit score?
Here are some life hacks for improving your credit score:
- Review your credit report. Identity theft, forgotten balances, and irregularities can hurt your rating. Dispute if applicable.
- Increase the frequency of your payments. Micropayments can improve your credit utilization factor.
- Get a Secured Credit Card, which is basically a prepaid credit card. The scoring systems love it when you make these regular payments and use the card faithfully.
- Don’t close your credit cards. Having them open increases the number of creditors with which you have good credit.
- Request to have your limits raised. You can capitalize on your now lower debt to available credit ratio.
- Vary the types of debt. Revolving credit payments and installment payments are different and together help your loan variability factor.
- Join someone’s account as an authorized user. Basically you can piggyback on someone else’s credit history for that account if you are a partner with them, even an inactive one.
Some people claim doing the above steps can raise your score by up to 100 points. That’s unlikely, but even if the score goes up by 50, that’s huge - tens of thousands of dollars. There is no question that when it comes to affecting interest rates, your credit matters!
It’s worth saying, though, that there are other factors that go into a lender’s decision to approve a loan and at what rate:
- Location of the home
- Loan term
- Home price
- Type of loan
- Type of Interest payments
- Amount of down payment
Since this is such a significant process, we recommend a few resources. The government provides a Buying a House tool that can be very handy for the overall process; and their Explore Interest Rates tool is excellent for understanding loans and how your credit matters in general.
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