As we have seen how mortgage rates have increased dramatically in the last few months, home buyers on a tight budget have lost some of their buying power. Rising interest rates directly affect home buyers in many ways and it’s high time we also look deeper into how to at least alleviate the burden.
Think finding the right home is the most important step in the home buying process? It’s not – the financial aspects of the home must be on your priority list. After all, you will be stuck with a monthly payment for a long time and it’s best that you can comfortably pay for it.
The bedrock of your mortgage is your credit score. If you don’t know already, your credit score holds a major influence on your interest rate. The better your score is, the better your interest rate will be. And it is especially important that you have a good credit score in these times when mortgage rates are rising.
Check out the graph below and see how your credit score can affect your interest rates as well as the monthly payment.
| Credit Score | APR | Monthly Payment | Total Interest Paid |
| 760-850 | 4.17% | $975 | $150,833 |
| 700-759 | 4.392% | $1,001 | $160,208 |
| 680-699 | 4.569% | $1,022 | $167,771 |
| 660-679 | 4.783% | $1,047 | $177,020 |
| 640-659 | 5.213% | $1,100 | $195,938 |
| 620-639 | 5.759% | $1,168 | $220,584 |
It’s not too late to improve your credit score. It’s important to understand what things affect your credit score both negatively and positively.
5 Things That Affect Your Credit Score
- Late payments. Pay your bills on time. This directly affects your credit score because late payments show up so quickly on credit reports. Even one late payment can cause your credit score to drop.
- Closing a credit card account. Closing a credit card account even when you’re not using them has the potential to reduce your credit score because it impacts your debt-to-credit ratio. One of the factors used to determine your credit scores is your “debt-to-credit” ratio. When you close an account you’ll end up with less available credit, raising your ratio. The more available credit you use (per your reports), the worse the impact will be on your score.
Your credit score also takes into account how long you have been using credit. The history of your credit accounts makes up 15% of your FICO Score. So that credit card you opened 10 or 15 years ago may well be helping to boost your credit score by increasing your average age of accounts.
- Opening new credit card accounts. Whenever you apply for a new line of credit, lenders typically do a hard inquiry on your credit information. Hard inquiries can cause a small and temporary decline in your credit score. At the same time and the new accounts themselves may lower the average age of your credit accounts. New credit makes up 10% of your FICO score.
- Not utilizing your credit. Credit utilization measures how much of your total available credit is being used. If you don’t use your credit account regularly, no new information is reported by the bureaus. Your credit utilization ratio – accounts for 30% of your FICO score. If you are not using your credit, it is more difficult for lenders and creditors to evaluate your application for credit or services. If you’re not using it for a long time, the creditor may close the account. It is best to use your credit accounts, especially for small purchases, and pay the bills on time.
- Get a free copy of your credit reports every 12 months. It’s important to take advantage of this offer if you hope to keep track of your credit score. Go to annualcreditreport.com for the details.
If you are hoping to get the best interest rates, it really pays to have a good credit score. It also goes without saying that a high credit score can give you better chances of getting a home loan.
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Source: GGAH
