Your credit score is one of the most important numbers in your financial life. This, along with the interest rate charged, will go a long way in determining whether your loan will be approved.
The impact is greatest on mortgages, given that buying a home costs a lot of money and loans last for a long time (30 years in most cases). The problem is, you can’t just snap your fingers and improve your credit score when you suddenly decide you want to buy a home. Did you know that you’ve been saving up for a down payment for months or even years? During that time, you’re probably already thinking about your credit score and how it could help or hurt your home purchase.
In other words, you don’t focus so much on whether you can afford a home and forget about preparing for a successful mortgage along the way.
@bankrate Your credit score is more than just a number, it’s what lenders use to price you in the future. Higher scores mean lower rates, better terms, and more options when it matters most. Here’s how you can start improving today.
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run the numbers
“Okay, but houses are expensive regardless of your credit score. It wouldn’t really matter if my score was a little lower than my neighbor’s, right?”
Consider the following example. The median home sale price in the United States is $405,300. With a 20% down payment, that means you’ll need to borrow $324,240. The average 30-year mortgage rate ranges from fair to excellent credit by almost 1 percentage point, and the difference can really add up.
A FICO score of 620 is definitely within the fair credit range and is the minimum standard to qualify for a conventional mortgage. According to Experian, the average 30-year mortgage rate for someone with a credit score of 620 is 7.14%. If you borrow $324,240 at 7.14% for 30 years, your monthly principal and interest payments will be $2,188.
If you manage to improve your credit score to 680 (good credit), the average interest rate on a 30-year fixed mortgage is 6.79%. Borrowing $324,240 at 6.79% for 30 years equates to monthly payments of $2,112, a savings of $76 per month and $27,360 over the life of the loan.
If you fall into the “very good” credit score range with a 740 score, the average interest rate on a 30-year fixed mortgage drops even further to 6.44%. Your monthly principal and interest payments will now be $2,037. That’s $151 less per month than the fair credit scenario and $75 less per month than the good credit scenario, resulting in savings of $54,360 and $27,000 over the life of the respective loans.
The FICO credit scoring scale is 300 to 850, but a score in the mid-700s is sufficient for most financial products. For things like credit cards and car loans, there’s no practical benefit to scoring 800 or 780 versus, say, 740. However, for home loans, the upper cutoff is 780 points.
The average 30-year fixed mortgage rate for a good borrower with a 780 credit score is 6.25%. This would reduce monthly principal and interest payments to $1,996 on a hypothetical $324,240 loan, or $192 less per month than the 620 credit score example. Over 30 years, you’ll save a whopping $69,120 in interest.
| credit score | interest rate | monthly payment | monthly savings | Annual savings | Lifetime savings (30 years) |
| 620 (normal) | 7.14% | $2,188 | – | – | – |
| 680 (good) | 6.79% | $2,112 | $76 | $912 | $27,360 |
| 740 (very good) | 6.44% | $2,037 | $151 | $1,812 | $54,360 |
| 780 (excellent) | 6.25% | $1,996 | $192 | $2,304 | $69,120 |
A guide to improving your credit score over the long term
Improving your score won’t happen overnight, but it can improve over months or even years. The steps are simple.
Establish a baseline. Start by checking your credit score and report so you know where you stand and can fix any potential errors (and they do happen). Many banks and credit card issuers offer free access to their customers. You can also take advantage of free resources such as AnnualCreditReport.com, Experian.com, and MyFICO.com.
If legitimate negative reviews are hurting your credit score, you should start adding positive marks to your file immediately. Late payments can stay on your credit report for up to seven years. Want some good news? The negative effects are most noticeable in the first two years.
Ask for a break. You can also ask the creditor to remove the goodwill. This includes asking them to remove the stain because you were a reliable customer and they failed you once. Explain your situation and be honest.
Please sign up for the appropriate account. One credit-building tool that can quickly yield results is to become an authorized user on the account of a trusted person with a good credit history. This allows you to take advantage of the company’s long track record of on-time payments and responsible credit behavior.
Filling out the proper information on your credit report can help negate negative marks on your report. This doesn’t make the bad stuff go away, but it still helps. Credit scoring systems generally reward thicker credit files. The more you can demonstrate that you are good at managing different types of credit, the better.
In addition to signing up for an easy-to-get credit card, such as a secured card or student card (if applicable), and using it responsibly, consider signing up for a credit-building loan. The basic premise is to set aside money each month and have most of it, minus a small fee, in your pocket at the end of the term (probably 6-12 months). These typically show up on your credit report as installment loans, so they’re a different form of credit than the revolving credit you see on file.
I’m also a big fan of alternative credit monitoring systems like Experian Boost and eCredable Lift. These can identify things you’re already doing, like paying your rent, utilities, or streaming service subscription bill on time, and bring it into your credit report. Traditional credit scoring algorithms don’t incorporate all of these payments, so you have to do a little bit of work to include them.
Recent credit score changes may work in your favor
There have been many innovations in credit scoring in recent years. Government-backed mortgage lenders were recently approved to use new credit scoring programs such as FICO 10T and VantageScore 4.0. This increases the likelihood that your mortgage application will benefit from things like Experian Boost and eCredable Lift. Note: These services only report to Experian and TransUnion, respectively. Mortgage lenders typically obtain information from all three major credit bureaus (Experian, TransUnion, and Equifax) and often use a median score for each applicant.
But one of the most impactful of these recent innovations has been the introduction of trend data. This refers to credit scoring systems that measure patterns, not just specific moments. This affects how the algorithm measures your credit usage, especially the credit you’re using on revolving accounts like credit cards divided by your available credit.
Until recently, credit availability started anew each month. Credit scoring systems had no memory, so to speak. Even if you’re spending a very high 80% of your credit limit one month, paying down to 10% the next month can significantly improve your credit score. However, the system now includes up to 24 months of trend data. Usually low usage, but occasional spikes in usage won’t negatively impact your score much. On the other hand, if your usage is typically high, reducing your usage by one month won’t make much of a difference.
This is consistent with the idea that credit scoring is more like a marathon than a sprint. Credit scoring systems and the financial institutions they serve want to see a long history of on-time payments and low utilization rates. So it’s ideal to try to keep your credit card bills relatively low, show your statement balance between 1% and 30% of your credit limit, and pay it off in full before accumulating interest.
conclusion
Some credit score fixes happen faster than others. Nothing irritates people more than deadlines, but honestly, it’s best to keep an eye on your credit score on a regular basis. We know you’re busy with other things and your credit score doesn’t necessarily matter, but before you get serious about looking for a home or buying a mortgage, give yourself at least six months (the longer the better) to get your credit report and score and start making any necessary adjustments.
The last thing I would recommend is that you don’t apply for any other credit during the mortgage process. Lenders may be nervous if you apply for a credit card or car loan during this sensitive time. Prioritize your mortgage and leave everything else for later.
Getting the best mortgage rates can save you tens of thousands of dollars. Improving your credit score and being an active shopper are the best ways to get the lowest mortgage rates.