How a Credit Score Affects Your Interest Rate

Each year thousands of prospective homeowners are shocked to discover their credit history will hinder their ability to own their dream home.

The very first thing that your loan officer checks when you apply for a mortgage or any kind of credit is your credit score. You are rated in terms of the score which in most cases influences the amount you can borrow. Understanding your credit score in a better way enhances your chances to develop a higher score and thus benefit from loans at better terms and conditions.

A credit score consists of many factors: your payment history, your credit card balances, bank accounts, including savings and checking accounts, and any other form of credit including all outstanding personal loans, mortgage loans, store credit cards, etc.

Credit scores are calculated from many different forms of credit data in your credit report. Each credit reporting bureau has their own standards and formulas that they use for the purpose of calculating a consumer’s credit score. The following is a generalized classification of a credit score rating:

Excellent credit rating - No late payments, no collection notices, no bankruptcies or repossessions.

Good credit rating - May contain a late payment within the last two years.

Fair credit rating - More than one late payment. May or may not have a bankruptcy or repossession in the last two to three years.

Poor credit rating - Recent collection attempts, late payments within the last year, bankruptcies and/or repossessions within the last two to three years.

The reason why a credit score is important is that it will determine your eligibility for a loan. A low credit score may hinder approval, and it will also impact the interest rate you will have to pay for the money that you borrow.

Since individuals with less than perfect credit traditionally present more of a risk of defaulting on a loan. Lenders are able to justify charging more interest to those consumers. The extra interest the lender earns on the loan is intended to compensate the lending agency in the event the consumer defaults on the loan. Over the course of a 15 or 30 year mortgage, those extra interest points can add up to an astounding amount of money.

Your credit score is the indication of your financial health. You should do your best to avoid damaging your credit history with late or missing payments, too many outstanding loans or too many loan requests. Watching your credit score closely especially before you make any major purchases will help you avoid unwanted surprises