Who's Keeping Score?
Your credit score is a numerical summary of how much you owe and how promptly you pay your bills. A higher credit score will save you thousands of dollars on your mortgage, insurance, car loan, and credit card costs. Auto insurers, for example, use credit scores to assess your risk of getting into an accident because studies show that consumers with high scores tend to file fewer claims.
The most commonly used credit score number is the FICO score, which ranges from 300-850. Only 13% of consumers have scores above 800 (with a median score of 723) and many lenders require a score of 760 or higher to get the best interest rates. In a recent comparison, borrowers with a score of 760 or higher qualified for an average interest rate of 5.8% on a 30 year fixed-rate mortgage, while borrowers with scores of 620 to 639 qualified for an average interest rate of 7.4%. For a $216,000 mortgage, that translates into $227 more each month, or $2724 per year.
In addition, a higher credit score will reduce the amount of documentation you are required to provide when applying for a loan.
Score What To Expect
720-850 lowest rate, with little or no documentation
680-719 marginally higher rates, full documentation
620-679 rates .5-1.5% higher, full documentation
below 620 rates 2-2% higher, full documentation
Quick Credit Score Tips
Your credit score is tabulated from you payment history (35%), outstanding balances (30%), length of credit history (15%), type of credit (10%), and credit inquiries (10%)
*Pay your bill on time. More than 1/3 of your score is based on your payment history; the later you are, the more points you lose. If you've fallen behind, pay up now.
*The percentage of your credit limit that you've actually used is more important than the amount of credit to which you have access. Experts recommend keeping the balance on your credit cards below 25% of your available credit; you can also ask your creditors to increase your credit limits.
*The length of your credit history accounts for 15% of your FICO score. If you open a flurry of new accounts, lender worry that you might go on a borrowing binge. Don't apply for new credit within three to six months before applying for a mortgage.
*Closing old accounts can actually hurt your score by raising your utilization ratio. Owing $5000.00 looks a lot better when you have a $20,000 maximum on all of your credit cards (a utilization ratio of 25%) than it does when you have a limit of $7000 (a utilization ratio of more than 70%)
*More utilities are reporting to the credit bureaus...which means that paying your electric and cable bills on time is just as important as paying your credit card bills.
As discussed previously in this column, consumers are now entitled to one free credit report per year (visit https://www.annualcreditreport.com for more information). Your mortgage broker is a good place to start to discuss credit score strategies.
Your credit score is a numerical summary of how much you owe and how promptly you pay your bills. A higher credit score will save you thousands of dollars on your mortgage, insurance, car loan, and credit card costs. Auto insurers, for example, use credit scores to assess your risk of getting into an accident because studies show that consumers with high scores tend to file fewer claims.
The most commonly used credit score number is the FICO score, which ranges from 300-850. Only 13% of consumers have scores above 800 (with a median score of 723) and many lenders require a score of 760 or higher to get the best interest rates. In a recent comparison, borrowers with a score of 760 or higher qualified for an average interest rate of 5.8% on a 30 year fixed-rate mortgage, while borrowers with scores of 620 to 639 qualified for an average interest rate of 7.4%. For a $216,000 mortgage, that translates into $227 more each month, or $2724 per year.
In addition, a higher credit score will reduce the amount of documentation you are required to provide when applying for a loan.
Score What To Expect
720-850 lowest rate, with little or no documentation
680-719 marginally higher rates, full documentation
620-679 rates .5-1.5% higher, full documentation
below 620 rates 2-2% higher, full documentation
Quick Credit Score Tips
Your credit score is tabulated from you payment history (35%), outstanding balances (30%), length of credit history (15%), type of credit (10%), and credit inquiries (10%)
*Pay your bill on time. More than 1/3 of your score is based on your payment history; the later you are, the more points you lose. If you've fallen behind, pay up now.
*The percentage of your credit limit that you've actually used is more important than the amount of credit to which you have access. Experts recommend keeping the balance on your credit cards below 25% of your available credit; you can also ask your creditors to increase your credit limits.
*The length of your credit history accounts for 15% of your FICO score. If you open a flurry of new accounts, lender worry that you might go on a borrowing binge. Don't apply for new credit within three to six months before applying for a mortgage.
*Closing old accounts can actually hurt your score by raising your utilization ratio. Owing $5000.00 looks a lot better when you have a $20,000 maximum on all of your credit cards (a utilization ratio of 25%) than it does when you have a limit of $7000 (a utilization ratio of more than 70%)
*More utilities are reporting to the credit bureaus...which means that paying your electric and cable bills on time is just as important as paying your credit card bills.
As discussed previously in this column, consumers are now entitled to one free credit report per year (visit https://www.annualcreditreport.com for more information). Your mortgage broker is a good place to start to discuss credit score strategies.
Labels: 720-850
