If your credit score is below 760, you may not qualify for the lowest interest rate on a mortgage. This might not seem like a big deal to you, but it actually is. Even if your rate is only a little lower than it otherwise could be, it can end up costing you a fortune.
You can play with this mortgage savings calculator to see what you can expect to save with different FICO scores. As an example, if you take a mortgage of $300,000 for 30 years and have a 679 score rather than 760, your rate will be about .6% higher per year. The result of that will be that you’ll have to pay $27,000 more over the life of the loan than you otherwise could have.
Think of this a different way. That .6% difference in interest rates is equal to $76 per month which you can save and invest in an IRA or 401k. Assuming a 5% rate, you will have a nice little retirement fund of over $63,500 by the time the mortgage is paid off.
With so much on the line, it is definitely a smart move to do everything you can to improve your credit score to get the lowest rate possible. Boost your credit score with these 5 overlooked steps:
1. Understand how your credit score is calculated
Take a little time to understand the landscape. It will be much easier to improve your credit score after you understand how credit bureaus put it together. Basically, your credit score is made up of 5 parts:
- The total amount you owe
- Length of credit history
- Payment history
- How recently you’ve opened credit lines
- The type of credit you use
You can’t change how long you’ve had credit. But you can definitely work on most of the other pieces of your credit puzzle.
2. Fix your finances
It makes no sense to spend a lot of time and energy cleaning up your past credit mistakes if your current financial behavior makes your credit situation worse.
Are you paying your bills on time? If not, make it happen. This has to be your first priority. With every month that passes, your credit score sinks if you don’t stay current on your bills.
If you are serious about getting a high score to push your mortgage rate down, nothing else is more important than paying your bills on time.
You may have to take drastic action like slashing your spending or taking on a second job to achieve this. This may seem like a lot to ask right now, but remember that these sacrifices will probably only need to continue for a short period of time. The benefits of qualifying for a low mortgage rate go on for years and years.
3. Scrub your credit score
The credit bureaus calculate your credit score by collecting information about you (and everybody else) from everywhere possible. These credit bureaus keep tabs on millions of people and process billions of data bits each year. It’s only natural that sometimes they make mistakes.
If you happen to be one of the unlucky people who have false negative information on your credit score, you have to understand that it’s up to you to get this fixed. Nobody will do it for you.
And if you think about it, the odds are high that you do have some false negatives in your credit file. Some experts report that there is a one in five chance that your credit report contains errors. That said, it’s in your interest to double check everything in your report.
Start by getting your credit report and going through it with a fine-tooth comb. Identify any negative information and contest any mistakes. The good news is if you bring errors to the attention of the credit bureaus they have to verify the information within 30 days or remove the negative data.
Most errors are easy to identify and fix, but sometimes the credit bureau lacks the proper attitude.
If you go through this process and uncover mistakes you should bring them to the attention of the credit bureaus. If they still won’t do the right thing, it might be time to call in a qualified credit attorney. As long as you hire the right person, the small investment could pay huge dividends for years to come.
4. Be unconventional
The people who calculate credit scores love to look at different ratios in order to size you up. One important number they consider is your credit utilization ratio. This simply compares the total available credit with the amount of debt you currently have. For example, if you have total credit available of $30,000 but only have $3,000 in credit card debt, your utilization is 10% ($3,000 divided by $30,000). That’s a score credit bureaus like and reward such people with higher credit scores.
If you max out your cards and owe $30,000 on available $30,000 credit, your utilization is 100% and that’s something that scares the living daylights out of creditors and credit bureaus. People in this situation take real hits to their credit score.
One thing you might consider is refinancing your debt. You can refinance with family, friends, or even a peer-to-peer lender. Such loans are usually not reported to the credit bureaus.
So, in the case above, if the person who has $30,000 in credit card debt gets his family to refinance $20,000 of that debt, his credit utilization could drop from 100% to 33% overnight. Of course, you may have to disclose these other debts on the credit application.
Other options are selling assets or even asking for early holiday gifts or advances on inheritance money. These are bold moves but if appropriate for your situation, you could use the proceeds to pay off debt and see your credit score skyrocket.
5. Be proactive
It can take some time to implement these tactics so the sooner you get to it the better. Don’t allow yourself to become complacent or frozen in the complexity of this issue.
Take time. Be methodical. The benefits of having a great credit score far outweigh the time spent in making it happen.
What steps have you taken to improve your credit score in order to get the best mortgage possible?