How does my credit score impact my mortgage interest rate?

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Your credit score is one of the strongest indicators of your ability and track record for paying back your debts in a timely manner. In the same way you might be more hesitant to loan money to a friend who doesn’t pay you back or takes a long time to do so, lenders feel the same way about mortgages.

For that reason, your credit score has a huge impact on the interest rate your lender is willing to give you. For instance, if you have a poor credit score, you are likely to get a higher interest rate because your loan will be considered a higher risk loan and therefore potentially more costly. On the other hand, a higher credit score borrower has a track record for paying back debts and will typically benefit with a lower interest rate.

When interest rates drop to low levels, it doesn’t mean all home buyers or homeowners are able to take advantage of these lower rates. It will depend upon many factors, but your credit score is one of the most important factors impacting the ultimate interest rate a lender offers you on your mortgage.

WATCH: CREDIT SCORE IMPACT ON MORTGAGE 

Credit Scores & How Lenders View Them

The impact of your credit score on your mortgage interest rate will vary depending on the type of mortgage you are applying for. Conventional mortgages which are one of the most common types of mortgages put a large emphasis on credit score. However, FHA loans and other government-backed loans offer low credit score loan options.

When a mortgage company is looking at your scores, here are the buckets they generally put you in based on your score:

  • Excellent Credit = 720 or higher credit score
  • Good Credit = 690 – 719 credit score
  • Fair Credit = 630 – 689 credit score
  • Poor Credit = 629 or below credit score

Tips for Improving Your Credit Score

Dispute Incorrect Credit Reports: When looking at your credit score, examine them thoroughly to make sure there isn’t any information that is incorrect. If you do see late payments or unpaid bills that aren’t correct, make sure to file a dispute ASAP.

Pay Down Balances: If you have multiple credit cards that are maxed out, it is critical to pay down those debts to much lower levels. For example, if you have a credit line of $5,000 and you owe all $5,000, your credit utilization is 100%. Some experts say 30% or less credit utilization is best for your credit score.

Pay Credit Cards Twice a Month: Your credit score is a point in time date point. That means if you’ve maxed out your credit card at a time when your credit is pulled, you’ll show a 100% credit utilization rate. Keeping that low when you run your credit report is critical.

Increase Your Limits: Perhaps you aren’t in a position to pay off your debts completely, but you can improve your credit utilization rate by increasing your credit limit. This will be subject to approval by your credit card company.