How Your Credit Score Determines Your Home Loan Interest Rate

By MyVine | July 4, 2011

There are plenty of issues that affect your credit score and lots of things you can do to improve your credit score in a relatively short amount of time . As Home Loan Credit Score demonstrates , very often your score can be raised by merely addressing issues that you’ve overlooked or didn’t notice. That’s why it’s important to address issues on your credit report annually, if not more often . By making note of , and dealing with issues like late payments, the amount of credit you have usable, and the number of requests you have for new credit, you can circumvent many of the credit pitfalls and even work to improve your recent credit situation.

You might be surprised to learn 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 a year on your mortgage payment. If your mortgage payment is $1,080 at a 5.051% interest rate that same payout at a 4.829% interest rate would cost you about $1,050. That’s $360 a annually , or $10,800 over the life of your mortgage. If you improve your credit score 100 points, those numbers more than double. The most unbelievable thing about this is that much of the time you can better your FICO score as much as 125 points in as little as than 2 months.

Considering that such a small lowering in your interest rate can drastically reduce your mortgage payment, it’s well worth getting your FICO score increased as much as you can before getting a mortgage. To do this, you should address 5 pieces 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 disputed if it’s not correct , but should be done with the direction of a Credit Score Professional.

30% of your FICO score is concerned with remaining debt. By keeping your debt at no more than 50% you can strengthen your credit score. By keeping your balances below 25%, you are modeling a lifestyle that is acceptable risk to creditors and this can lead to a much higher 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 want to have accounts that are open for longer than 7 years. This area can be addressed by limiting the number of accounts you close and not transferring old account balances to new accounts.

10% is related to the sort of credit you use. By maintaining several different kinds of credit, having plenty of accounts that are installment loans, revolving accounts and mortgage loans you can effectively raise your FICO score. It’s also important to avoid high risk “consumer finance institutes.” These types of accounts can reduce your credit score because they’re seen as last resort creditors.

The final 10% is concerned with 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 reduce your score.

To learn more about how you can increase your credit score and how to more wisely manage the different parts of your credit, look into Improving Your Credit Score, and Review Your Credit Report.

This article is written by Morgan Best.

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