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Billy Beach

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bbeach@inspirofinancial.com

An Excellent Credit Score can Save you Big Money

An Excellent Credit Score can Save you Big Money

As interest rates on long-term mortgages continue to rise, buying a home at today’s record-high prices can be a challenge. However, a recent study from Zillow found that there is one thing home buyers can do to save themselves big time when it comes to mortgage loans: improve their credit scores.

“This is one actionable thing buyers can do to save a little bit of money in this market,” said Amanda Pendleton, consumer finance expert at Zillow Home Loans in an interview with CNBC.

Credit Scores Are Heavy Hitters

This is because lenders use credit scores as a way to gauge how likely it is that a borrower will repay the loan. It is not the only factor, but it does play a large role in not only determining if a buyer will qualify for a mortgage, but also what type of interest rate they will be offered. 

The Zillow study reported that based on the average U.S. home price today - $354,165 - home buyers with lower credit scores will pay up to $103,626 more over the course of a 30-year fixed mortgage loan than another buyer with excellent credit. 

That works out to about $288 more a month for those with fair credit scores, or those between 620 and 639, than those with scores considered excellent, between 760 and 850.

And the difference comes from the range of interest rates those borrowers receive. For example, while someone with excellent credit might have been offered a rate of 5.099% in August 2022 on a 30-year fixed mortgage, a borrower with only fair credit would be charged 6.688% at that same point in time, according to Zillow’s surveys.

The Ingredients of a Credit Score

Credit scores are based on five basic factors. First and most influential is your payment history. Do you have a good track record of paying your bills on time? Each late payment will ding your credit score. 

The second factor is how much debt you owe relative to your available credit. If you are maxing out your credit card limits, it looks like you may be in a more desperate financial situation and more at risk for falling behind on payments. 

Third, the length of your credit history helps determine your score. The longer your time using credit, the more data the credit bureaus have to get an accurate picture of your creditworthiness. 

The fourth credit aspect is the type of credit accounts you access. Installment loans like car and student debt tend to push your score higher while using lots of revolving loan like credit cards can lower it. 

And finally, the last factor is how much new credit you’ve applied for lately. Any credit inquiries stay on your report for between 12 and 18 months. If you are constantly searching for new lines of credit, it can look like you are not managing your money well.

Improving Your Score

You can start by checking your credit report, which you can do for free with each of the three major credit reporting bureaus. Start by looking for any errors and alert the bureaus immediately to correct them. This could give your score a quick boost.

If you’ve been missing payments or falling behind, you can see a decent uptick in your score if you concentrate on paying everything strictly on time for the next six months. And if you can manage to pay down your debts during that same time to 30% or less of your credit limits, you will also see a score improvement. And definitely refrain from applying for any new loans for several months before buying a home or even once the mortgage process begins. Hold off on buying that new furniture or new car until your loan closes.

While improving your credit score does take some time, it can really pay off when it comes to saving money on your next home purchase.

Please give us a call today to see what your payment could be if you were to purchase or refinance your home.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.

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