You don't need an article to tell you that only those with great credit get the best mortgage rates. But The New York Times recently reported a story that illustrates just how expensive a relatively minor blot on your credit history can be.
The Wrong Sort of "Jumbo" Mortgage Rates
Although she didn't know it at the time, things started to go wrong for Megan Barringer back in 2007. It was then she was the victim of a mix-up over a $742 medical bill. Megan paid the invoice, but by the time she did it had already gone to collection.
Until she applied for a home loan in April 2013, Megan didn't even realize that as a result of that confusion many years before, a blot had appeared on her otherwise spotless credit report. And that meant her new $298,000 mortgage would be more expensive than it should otherwise have been -- much more expensive. Indeed, the Times reckoned that the cost of that single blemish would be $33,000 over the next 30 years.
You could say that Megan should wait a year or two until her credit report returns to its former pristine state (collection accounts stay on reports for seven years), and then refinance. But who knows how high 30-year fixed mortgage rates could have climbed by then? The Mortgage Bankers Association [PDF] expects them to average 4.6 percent by the last quarter of 2014.
The Moral of Megan's Story
The moral of Megan's story is that it's important to take your credit score seriously, not just when you're thinking of applying for a big loan like a mortgage (although it's especially important then), but also regularly throughout your life.
At the very least, it's a good idea to take advantage of your legal right to see, at no cost to you, all your credit reports once a year. You can do that by applying at AnnualCreditReport.com. If you wish, you could choose to pay for more regular access, which allows you monitor your score more closely, as well as enabling you to spot more quickly identity fraud and errors.
Credit Report Mistakes Are Very Common
If the old saying, "To err is human," is correct, then credit bureaus are very human indeed. In 2013, the Federal Trade Commission found that 25 percent of all reports contained errors that could affect consumers' credit scores. And five percent of Americans saw their credit scores change by more than 25 points when an error was corrected. A very few lucky ones saw a 100+ points change.
Depending on your old score, a 25-point change could easily see you qualify for lower mortgage rates than previously, so accessing your credit reports before applying for a home loan is a must-do.
Improving Your Credit Score
There are longer-term credit strategies you can adopt that might help you qualify for low mortgage rates. FICO, the company behind the scoring system used in 90 percent of lending decisions in this country, suggests:
- Prompt payments. Pay bills on time. Your payment history accounts for 35 percent of your total credit score. If you're behind with any payments, get current, and stay that way. Either way, set up automated payment reminders or use an automated payment service.
- Credit utilization. Another 30 percent of your score relates to the amount you owe. This has less to do with the total dollar sum than your "credit utilization:" the proportion of your available credit that you're actually using. So try to get your credit card balances down to 20-30 percent of your credit limits, and don't close old card accounts to try to raise your score.
- Length of credit history. There's not a lot you can do to lengthen your credit history. But opening multiple new accounts can be especially damaging if you have a brief one.
- Rate shopping. Compare mortgage rates (and comparison shop for all borrowing) within short periods. FICO tries to differentiate between someone widely researching a single loan, and someone piling up searches because she or he's desperate for credit. But it bases its conclusions on the length of time over which applications are made, so short bursts of research are best.
- Check your credit report often. You can check your own report as often as you like. without damage to your score.
- Mix your credit. It's generally a bad idea to open new accounts just before you apply for a mortgage, so avoid applying for car loans, credit cards or other accounts in the months leading up to a home purchase or refinancing. However, overall FICO likes to see a healthy mix of revolving credit and installment loans.
None of those six suggestions is going to fix your credit score overnight. But, with patience, they could make a future home loan more affordable. One thing's for sure: ignoring their credit reports costs some people tens of thousands of dollars -- maybe even more. The effort involved in not being one of them is well worthwhile.