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In just a matter of months, mortgage rates have surged from just over 3% for a 30-year fixed loan to just north of 5%.
As potential homebuyers follow those figures, there is one thing they may be overlooking: their credit score.
The three-digit number has a big impact on the interest rate you’ll get on a mortgage. The higher the score, the lower the rate.
Credit scores range from 300 to 850. A good score is 670 to 739, very good is 740 to 799, and 800 and up is considered excellent, according to FICO, a leading credit scoring company.
The mortgage rate for a 30-year-fixed loan, is now down slightly at 4.99%, according to Mortgage Daily News. To land that rate, your credit score should generally be over 740, said Glenn Brunker, president of Ally Home, which provides mortgage services and products.
Under 740 and lenders start to add in more costs to reflect the additional lending risk, he said. That is either added to the interest rate or it can be paid separately in what’s known as points. One point equals 1% of your mortgage loan.
“It doesn’t sound all that significant but when you think about adding an extra $20, $40 or $60 a month to your monthly payment as a result of a lower credit score, it can materially change your monthly budget and what you can afford,” Brunker said.
With mortgage rates expected to continue climbing higher, consider making moves to lower your credit score to take advantage of the best rates available. Here’s what you can do.
1. Check your credit report
Your credit report is essentially a history of your credit activity and includes payment histories, credit card balances and other debt. A number of factors on that report help determine your credit score.
Pulling your report before you apply for a mortgage or preapproval, ideally a few months in advance, will give you time to correct any issues you find.
Traditionally, you are allowed one free credit report a year from the three main credit scoring companies: Experian, Equifax and TransUnion. You can reach out to each directly or you can access them through annualcreditreport.com. During the Covid-19 pandemic, free access was upped to once a week — but that expires April 20.
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Also bear in mind that on July 1, Equifax, Experian and TransUnion should remove any medical debts that were sent to debt collectors and eventually paid off.
“That could instantly improve somebody’s credit score a lot,” said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
“Someone with an otherwise good credit score could lose 100 points or more if they have medical debt.”
2. Pay your bills on time
Late or missed payments can knock down your score.
The easiest way to avoid that is to set up automated payments for your bills.
“The consistency of paying bills…
Read More: Here’s why your credit score matters and how to improve it