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The interest rate you'll pay for the money you borrow will be determined in large part by information in your credit report. Most lenders have lending guidelines according to your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is 698, those 2 points could cost an interest rate difference of .5%! On a $165,000 30-year fixed rate mortgage, that half point could cost you more than $19,000 in interest charges, assuming 6% is the lowest rate available. Fall below a 675 and the rate goes up another 1.2%!
Each of the three bureaus (Experian, Trans Union, Equifax) employs its own scoring system, so a given person will usually have 3 separate scores. Someone with a higher score will be viewed as a better risk than someone with a lower score. Typically, scores will range from about 600 to 700 or above, although some cases will be outside this range.
HOW IS YOUR CREDIT SCORE DETERMINED?
1) Past payment history (about 35% of score) - The fewer the late payments the better. Your credit report will indicate whether you are 30, 60, 90 days or more late with a payment. A history of late payments on several accounts will cause more damage than late payments on a single account. Recent late payments will have a much greater impact than a very old Bankruptcy with perfect credit since. Pay your bills consistently on time and greatly improve your overall score. Paying on time can up your score to 727. Not making your payments on time can bring your score to 582. The national average of on-time bill payers is 68%.
2) Credit use (about 30% of score) - Add up all of your outstanding balances and compare the number to the amount of credit that is available to you. Lenders prefer that you are reaching your credit limit on every card. They also check to make sure the credit extended to you isn't out of proportion with your income. Low balances across several cards is better than the same balance concentrated on a few cards used closer to maximums. Maxing out your credit could bring your score down to the 630s.
3) Length of credit history (15% of score) - The longer accounts have been open the better for the score. Your score also takes into account how long it has been since you used certain accounts. Just having an idle card for ten years won't necessarily raise your credit score. Don't open a lot of new accounts at once to establish a credit history. The national average of most recent account opening was 20 months ago.
4) Types of credit used (10% of score) - Finance company accounts score lower than bank or department store accounts. If you have had no credit, lenders will consider you a higher risk than someone who has managed credit cards responsibly. Transfering your balances to a lower interest rate credit card may help pay your debt off faster, but the lender sees that you still owe the same amount of money.
5) Inquiries (10% of score) - Each time you apply for new credit, an inquiry shows up on your report. Multiple inquiries can be a risk if several cards are applied for or other accounts are close to maxed out. Multiple mortgage or car inquiries within a 14-day period are counted as one inquiry. Red flags start waving when you take on more credit, or even just apply for new credit, in a short period of time.
Start shopping online! Email LindaWiller@remax.net for property listings in your price range