How to raise your credit score & save thousands on a mortgage

You’ve probably heard that it takes years to build good credit.

And while it’s true that it might take years of responsible financial behavior to get an excellent credit rating, it’s also true that there are ways you can raise your credit score enough to get a better mortgage interest rate in a matter of weeks.

How Your Credit Score Affects Your Interest Rate

When lenders offer you a mortgage interest rate, they’re doing so based on how much of a risk they perceive you to be. Your credit score is one of the first things they check. The higher your credit score, the lower your interest rate.

In fact, this is such an accepted rule that FICO, the agency on which 90 percent of the lending institutions rely, publishes a chart which matches credit scores to interest rates. These are not set in stone, of course; lenders consider many factors when deciding on mortgage terms, but the chart is a good start.

Here’s what that chart looked like on July 27, 2015:

Credit Score APR
760-850 3.673%
700-759 3.895%
680-699 4.072%
660-679 4.286%
640-659 4.716%
620-639 5.262%

 

As you can see, a few points higher on your credit score could land you a lower interest rate on your mortgage. So, let’s see how to do that.

30%: The Magic Number

If you have credit cards – and what American doesn’t? – you should be aware of the 30 percent rule. Studies have found that the tipping point for when your outstanding credit card balance (the amount you owe) begins to negatively affect your credit score is 30 percent of your credit limit.

So, here’s a quick way to possibly raise your score by up to 10 points in a matter of weeks: pay down your credit cards to 30 percent. Here’s an example: Say you have a credit card with a limit of $3,000, and an outstanding balance of $1,500. If you were to pay just $600 off, it would lower the outstanding balance to $900, the magic 30 percent target.

Now say that your FICO credit score before you did that was 635 and after paying down the card it was 645. Using the FICO chart, that would result in an almost .5% better APR. On a $300,000, 30-year mortgage, you get a $100 lower monthly payment and pay $36,015 less in lifetime interest. That’s a pretty good return on $600.

Put it to the Test

Lowering your credit score is vital to your chances at a good interest rate. Not only that, but studies show that borrowers who shop lenders get offered lower interest rates and save money.

LendingTree, one of the nation’s most respected mortgage comparison-shopping websites, found that borrowers who compared at least two different mortgage offers could save $11,000 over the life of the loan due to the difference in interest rates being offered. Those who compared three offers? A cool $16,000 in potential savings.

Now for the kicker: smart shoppers who compared five different mortgage offers could save a whopping $24,000 on an average-size loan solely because of the difference in interest rates. That’s serious money. It'd be smart to act now before interest rates rise.
 

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