How Credit Score Affects Your Interest Rate
Do you have a low credit score? A lot of us have been there. Shoot! I’ve been there. It can happen to anyone and the problem is, when you go to try and purchase something like a house or a car, that credit score could come back to haunt you.
Let’s say you want to buy a house. If you don’t know by now, the better your credit score, the lower your home loan interest rate will be. Good Score = Lower interest rate, Bad Score = higher interest rate or not even qualifying at all.
Your credit score is your lender’s way of determining how likely you are to pay back your home loan. If you’re paying your debts (ie. car, rental, and credit card payments) on time and keeping a low balance, then you’re more likely, in the lender’s eyes, to have the ability to pay your monthly mortgage on time and in full. But, if you’re credit score is low, lenders will adjust your home loan interest rate to something higher because you’re somewhat of a risk and they might as well make a little more money off you over the long term.
The thing is, if you do have a low credit score, there are a number of ways to bring it up!
Don’t close your credit card account. Keep any existing credit card you have open.
I know it sounds weird. Isn’t that credit card the reason you got into this mess? Well, the thing is, credit bureaus actually look to see if you have an established credit history. In other words, the older the credit card, the better. Just make sure if you have used them, that they’re paid off, which bring us to another way to get your credit score up…
Pay off debt that is most recent.
Look at your past due balances over the last two years. Everything that went into collections, charge-offs, etc. Credit bureaus are more interested in your most recent debt. Believe it or not, paying off items older than two years old might actually lower your credit score.
Check your credit score yearly and remove any errors you find in your report.
Go to www.creditkarma.com and look up your credit report (You are entitled to one free check a year). Review the report for any errors (perhaps it says you still owe money on a fridge you bought 5 years ago, but you swear you paid it off!). Regardless of what it is, just make sure you dispute it or challenge any information that you think is wrong. The credit reporting company has 30 days to respond to you.
If you’re going to use more than one credit card, then try to keep all of them under 30% of the available credit limit.
It’s about keeping your balances as close to zero as possible. That’s how your credit score goes up. So if you’re credit card has a limit of $10,000, then make sure you don’t have a balance of more than $3,000 on it, or else that credit score of yours will lose some points. Every once and awhile your credit card will increase your credit line and that means that your debt to credit ratio will be reduced, which means that score of yours will go up!
Those are just 4 ways to help you increase your credit score so you can buy a home. Once you’re ready to buy, contact me below and we’ll start looking for your dream home!