Home Loan Interest Rates Are Based on Your Credit Score

There are many factors that affect your credit score and several changes you can make to improve your credit score in a relatively short amount of time. As Home Loan Credit Score shows you, very often your score can be raised by merely addressing a few things that you’ve overlooked or didn’t notice. That’s why it’s key to review your credit report at least once a year, if not more often. By paying attention to, 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 problems and even work to improve your existing credit situation.

You might be interested to learn just how much your FICO score is concerned 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 expense at a 4.829% interest rate would cost you about $1,050. That’s $360 a year, or $10,800 throughout the payment history of a 30 year mortgage. If you raise your credit score 100 points, those numbers more than double. The most surprising thing about this is that quite often you can strengthen your FICO score as much as 125 points in no more than 2 months.

Considering that such a small lowering in your interest rate can lower your mortgage payment, it’s definitely worth getting your FICO score improved if you are able before applying for a mortgage. To do this, you would be wise to address 5 areas of your credit report.

35% of your credit score is determined by your payment history. This area concerns any late payments you may have, bankruptcies, charge-offs or collections and can have some adverse affects on your credit score. Information in this area can be challenged if it’s not without error, but should be done with the counselling of a Credit Score Professional.

30% of your FICO score is having to do with outstanding debt. By keeping your debt at no more than 50% you can increase your credit score. By keeping your balances below 25%, you are demonstrating a lifestyle that is the lowest risk to creditors and this can lead to a much better score.

15% of your score is concerning the length of your credit history. Keeping accounts open for as long as possible can improve  your credit score. Ideally, you should try 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 moving old account balances to new accounts.

10% is related to the type of credit you use. By keeping a nice array of different types 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 lower your credit score because they’re considered to be last resort creditors.

The final 10% is concerned with new credit. This area relates to how long it’s been since you opened your most recent account. Also having more than 4 inquiries on your credit history within a 6 month period can seriously affect your score.

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

This article is written by Morgan Best.

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