If you're thinking
about buying a house or a car, your credit score is a very important number.
The interest rate
you'll pay for the money you borrow will be determined, in large part, by this
three-digit number that's generated from the information in your credit report.
Most lenders have
carved-in-stone rules about handing out the best terms, and those rules almost
always place a major emphasis on your credit score. If their best rates are
offered to borrowers with a score of 700 or higher and yours is a 698, those
two points could cost you thousands of dollars.
According to
MyFICO.com, the consumer website of popular scoring model FICO, the interest
rate difference between those two scores is about one-third of a percentage
point.
On a $165,000 30-year
fixed-rate mortgage, that difference could cost you more than $13,378 in
interest charges, assuming a 4.5 percent interest rate with a 700 credit score
and a 4.875 percent rate on a 698 score. Fall below a 660 and the rate goes up
even more, if you can even get approved for a mortgage at all.
Keep in mind that these
are averages. Most lenders today practice tiered pricing, with interest rates
rising as scores go down. Each lender chooses its own "break points"
between tiers. Lender A may bump up the interest rate if a score falls below
700, while Lender B doesn't charge higher rates until the score is 690 or
below. So if you stick with one lender, and that lender's break point is 700,
raising your score from 698 to 701 can be vital.
This underscores the
importance of not only doing all you can to improve your score, but shopping
thoroughly when looking for a mortgage. From the perspective of a mortgage
broker, who can choose among a sea of many lenders, there are no sharp break
points. Consumers should do what a good broker does -- look for a lender that
offers the best rate for a specific score.
But that's jumping
ahead of ourselves. First things first: You can take steps to improve your
credit score. The number of variables that play into an individual score make
it impossible to say that one particular action will increase a given score by
a certain number of points. But there are some good guidelines.
Bankrate
Fico
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