If you are thinking about buying a home soon, there is a single number that can play a huge role in your financial fate: your credit score. Credit scores are a rating that tells lenders about the potential risk of giving you money, using a scoring system from 300 to 800. Having an excellent credit score (defined as 720 and up) can provide you with the best rates and the lowest monthly payments, while scores under 620 make it extremely difficult to get approved for a loan with good terms.
There is no standard scale that defines how an interest rate changes based on your credit score, but generally speaking a difference of 100 to 120 points on your credit score could make a difference of 1.5 percent or more on your mortgage loan rate. If you’re borrowing $250,000 for a home, that’s $225 more on your monthly payment, and over the life of a 30-year loan you’ll pay over $80,000 more in interest with the lower credit score.
The keys to raising your credit score aren’t a mystery, but they do take some time, so here are three things you can start doing right now that will boost your score before you try to get approved for that loan.
Pay Down Credit Card Balances
Lenders look at the amount of revolving credit you have available and compare that to how much of it you’re using. If you have high balances on your credit cards, it will impact your credit rating, especially if your ratio of debt-to-available-credit is over 30 percent. Pay off credit cards, and stop charging things to your cards to keep those balances as low as possible. It’s also a good idea to keep any balances that you do have to one or two cards, rather than spreading out balances across many cards.
Don’t Take Out Other Large Loans
One of the factors that creditors use to evaluate your risk is the number of large loans you have taken out recently. Every time you apply for new credit that impacts your overall credit score, so if you purchased a couple of new vehicles and just took out a big student loan in the last three months, your score will be lower than if you spread out your big purchases.
Pay Bills on Time and Avoid Risky Credit Situations
The best way to maintain a high credit score in the long run is to pay all your bills on time. Sometimes when you’re thinking about a big purchase like a home you’re stashing money away for a down payment or other expenses and you accidentally miss payments on some of your bills, or you significantly reduce your credit payments in the months leading up to the purchase than you were before. Both of these actions can indicate potential risk and could lower your credit score. To avoid the appearance of risk, pay all your bills on time, and don’t do anything drastic with your finances right before you buy.
For more tips on maintaining a good credit score, or to get the latest mortgage rates and find out how to make your dreams of owning a home into a reality, talk to Altius Mortgage today.