If you want to take advantage of today’s low interest rates, you must qualify for your rates with attractive credit scores. High credit scores are earned through on-time credit payments, carefully managing debt, and keeping accounts in good standing, among other means.
Back in the 1980s, The Fair Isaac Company developed software that issues credit scores, a number that indicates your level of creditworthiness based on data gathered from creditors, landlords, tax bases, student loan lenders, and child support agencies, savings institutions, lack of credit and much more.
All three credit-reporting bureaus, Experian, TransUnion and Equifax use the software to determine your credit “FICO” score. It’s possible to have three different credit scores because the credit bureaus either have inconsistent data about you or they weigh your data a little differently.
Credit scores are a major short-hand tool bankers use to manage risk. They want to learn how much credit you use and how wisely, your debt-to-income, and if you have any defaults, liens, bankruptcies, judgments, etc. They look at your monthly obligations such as child support or alimony.
According to MyFICO.com, FICO scores range from 300 to 850, the higher the better.
- Payment History — 35%
- Total Amounts Owed — 30%
- Length of Credit History — 15%
- New Credit — 10%
- Type of Credit in Use — 10%
When you apply for a mortgage, the bank uses your social security number to look up your credit reports and scores. They base their decision to lend to you, plus how much interest they charge you, on your scores.
The best loan rates go to the borrowers with the best credit histories. As you can see from the FICO break-down, that most banks will be most interested in how much you owe and whether you pay on time.
You can get a loan with lower scores, but expect banks to require more money down, and to lower the amount they’ll loan you on a home so you can keep your debt-to-income ratio lower. And, they’ll charge you higher interest rates.
Rates that are advertised are typically for a benchmark 30-year, fixed-rate mortgage. These low-appearing rates are given to only the most credit-worthy homebuyers. What that means is that the rate is only available to those whose credit scores are high. High scores indicate high levels of responsibility, making the borrower a better candidate for a loan.
So if you want the best interest rate, take good care of your credit.