Interest Rates and Credit Reports: By the Numbers

Your credit score (or FICO score) is not all that is taken into consideration when a creditor determines your lending rate for a home... but it certainly does account for a lot. Scores range between 300 (terminal credit care) and 850 (credit sainthood), and your score definitely will affect your interest rates.

Your credit score will reflect five factors of your credit use: your credit payment history (accounts for 35%), your existing debt (30%), how long you have had credit (15%), what type of credit you have (10%), and what types of credit you use (10%).

Here is an example of different interest rates based on credit scores for the same loan. This data pertains to a fixed-rate $215,000 loan over a 30-year mortgage, in July 2006:

One aspect of this system that surprises and frightens people is how small the range of scores is that can result in different interest rates. A difference of 20 points seems very small, but in reality, relatively small decisions or mistakes can cause a home’s affordable interest rates to slip just out of reach. For those with lower scores, tiny shifts up and down can be very significant.

As a result, the highest, least preferred rate will cause monthly mortgage payments of almost $1,600, while the lowest rate comes with payments well under $1,400. The median credit score in America is right now 723, while the average is 676. The lowest possible score that still is considered “ok” is right around 650.

To improve your chances of getting a home or an even better refinancing, go back to the basics of what goes into your credit score. Begin to address, and improve upon, the five areas of credit at least six months before looking for a mortgage.

If your score is very low - below 600 - it does not mean you should give up hope of getting a home. It is true that the ‘cut off’ score at which most creditors will lend is 620, but if you are below 600 it still is possible for you to obtain a loan… albeit with very high interest rates. For example, if your score is 580, you will be paying 3% more than someone with a score of 720. In this case, on a fixed-rate, 30-year, $150,000 loan, you will be paying at least $1200 per month while your contemporary pays $890. In fact, you can secure a loan even if your score is as low as 520, but expect to pay much more and possibly to give up equity in a case of refinancing.

No matter what your credit score, everyone can benefit by paying attention to their reports and working to raise their scores. Know your scores, and work on them, well before you plan to start shopping for a mortgage. If you find an error on your credit report and request a “rapid re-score” of your credit, you could obtain a new and improved score within 72 hours.

Remember that you actually have three credit scores, one from each of the three main reporting agencies. Sometimes scores vary among agencies, and it may be to your advantage to find out why. Some reports can differ as much as fifty points! Fixing an erroneous report can be the difference between one interest rate and another, or between owning the home or your dreams or not.