Home Loan Interest Rates Are Based on Your Credit Score

By Doherty • March 11th, 2011
Financial Responsibility in the United States

Image by Bart Claeys via Flickr

There are several things that change your credit score and several changes you can make to improve your credit score pretty fast . As Home Loan Credit Score points out , very often your score can be improved by just addressing issues that you’ve overlooked or didn’t notice. That’s why it’s key to review your credit report fairly frequently . By being attentive , and dealing with issues like late payments, the amount of credit you have available, and the number of requests you have for new credit, you can circumvent many of the credit pitfalls and even work to improve your existing credit situation.

You might be interested to find out just how much your FICO score really has to do with the interest rate you get on your home loan. Just raising your FICO 50 points can save you hundreds of dollars annually on your mortgage payment. If your mortgage payment is $1,080 at a 5.051% interest rate that same expense at a 4.829% interest rate would be about $1,050. That’s $360 a every twelve month , or $10,800 over the life of your mortgage. If you increase your credit score 100 points, those numbers more than double. The most exciting thing about this is that much of the time you can better your FICO score as much as 125 points in less than 2 months.

Considering that such a piffling lowering in your interest rate can drastically reduce your mortgage payment, it’s well worth getting your FICO score improved if you are able before trying to get a mortgage. To do this, you would be wise to address 5 areas of your credit report.

35% of your credit score is associated with your payment history. This area concerns any late payments you may have, bankruptcies, charge-offs or collections and can have some negative impact on your credit score. Information in this area can be contested if it’s not without error , but should be done with the guidance of a Credit Score Professional.

30% of your FICO score is based on remaining debt. By keeping your debt under 50% you can strengthen your credit score. By keeping your balances below 25%, you are demonstrating responsibility that is the lowest risk to lenders and this can lead to a greater score.

15% of your score is based on the length of your credit history. Keeping accounts in existence for as long as possible raises   your credit score. Ideally, you should work to have accounts that are open for longer than 7 years. This area can be addressed by lowering how many accounts you close and not moving old account balances to new accounts.

10% is related to the type of credit you use. By keeping several different types of credit, having several accounts that are installment loans, revolving accounts and mortgage loans you can greatly improve your FICO score. It’s also helpful to avoid high risk “consumer finance institutes.” These types of accounts can bring down your credit score because they’re seen as last resort creditors.

The final 10% is determined by new credit. This area lends itself to how long it’s been since you opened your newest account. Also having more than 4 inquiries on your credit history within a 6 month period can have an adverse affect on your score.

To find out more about how you can raise your credit score and how to more wisely manage the different pieces of your credit, check out Improving Your Credit Score, and Review Your Credit Report.

This article is written by Morgan Best.

 

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