By Pascale Geday
What is a Credit Score?
A credit score is a numerical tool that determines how likely you are to pay your bills on time. This 3-digit number typically ranges from 300 to 850. The higher the credit scores, the lower the credit risk and vice versa.
A higher credit score correlates to lower risk as it shows the reliability of a borrower to repay his/her credit. Generally speaking, low risk means a lower interest rate for the borrower. Higher risk for lenders translates to a higher interest rate for borrowers to offset any potential bad debts or losses down the line.
There are three credit bureaus, namely Transunion, Experian, and Equifax, that each has a unique way to calculate your credit score. Each of the bureaus has an in-house scoring model that uses various data points, such as your bill payment history, the amount of credit you have, among several other factors, to come up with a credit score for you.
Mortgage lenders specifically consider your median score from the three scores available.
To recap:
• A high credit score is always favorable when applying to an array of different services such as a mortgage loan, car loan, credit cards, and more
• A score above 690 is considered to be good
Does My Credit Score Impact My Mortgage Rate?
The simple answer is: YES!
Your credit score directly impacts the interest rates available to you and this, in turn, impacts the interest you pay over the life of your loan. For example, someone with a fair credit score of 590 may get a 5% interest rate loan on a 30 year fixed term for a $100,000 loan. This translates to a total interest cost of $93,643 over the entire life of the loan (30 years)
However, suppose their credit score was excellent at 720. In that case, the same lender will offer them an interest rate of 3% for the $100,000 loan amount, and their total interest cost over the life of the loan would total $51,912.
So you can see the difference is staggering at $41,731 over the life of the loan – 30 years on a $100,000 loan amount.
What Other Factors Determine My Mortgage Rate?
While your credit score is just one data point the lenders look at when offering you a loan, other factors also affect Mortgage rates. For example:
- The down payment percentage when purchasing a home can affect mortgage pricing.
- Your income, as this affects your debt-to-income ratios. Lenders have parameters for both back-end and front-end debt-to-income ratios before they lend money. This ensures the ability to service the loan on the part of borrowers.
- Financial history (income and assets). Your financial history plays a significant part in deciding the loan amount and mortgage pricing available to you.
Conclusion
Mortgage lenders are more likely to lend to people whose credit score shows a strong history of on-time and consistent bill payments. For this reason, both your rate and your ability to qualify for a mortgage are highly dependent on a good credit score.