Your low credit score could cost you $21,000 - WFSB 3 Connecticut

Your low credit score could cost you $21,000

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MoneyTips

How much does your credit score affect your mortgage rates? A recent study by Zillow shows that the higher interest rates from a poor credit score can have a profound impact on the amount of interest you'll pay over the life of a mortgage.

Zillow analyzed over 100,000 mortgage quotes offered on Zillow Mortgages across the nation between March 25 and May 5. Using the nationwide median home price of $213,100 and a 20% down payment as a reference point, Zillow found that potential borrowers with excellent credit (above 760) could qualify for a 4.5% interest rate on a thirty-year fixed-rate mortgage. Borrowers with merely fair credit scores (640-679) could only qualify for a 5.1% rate. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

A change of 0.6% doesn't seem like much, but the differences add up. In this case, the drop from excellent to fair credit will cost you approximately $21,000 over the life of a thirty-year loan.

If you live in a market where homes are more expensive, the effect is even more profound. Apply the above example to San Jose ($1.3 million median home price), and the credit drop costs an additional $129,000. Conversely, in a relatively inexpensive urban market like Pittsburgh, where the median home price is $135,465, the credit score drop only costs $9,000.

When you're in the fair credit range, even a small increase has large positive effects. By bumping your credit score from the fair range to the good range (680-719), your interest rate offer for the national median home would decrease from 5.1% to 4.6% - bridging most of the gap between fair and excellent credit. According to Zillow's data, on the national scale, simply moving up from fair to good credit would save you $16,000 over the life of a 30-year loan.

Not every market follows the national example. In Cincinnati, Zillow found that the rates for excellent, good, and fair credit were 4.7%, 5.0%, and 5.2% respectively. In that market, going from fair to good credit saves $5,000 over the life of the median home loan while going from fair to excellent credit saves $12,000.

The Zillow study shows the credit score effects on median home costs for 53 urban markets. If you live in one of these markets, you can see the effects directly. If not, you can estimate the effects by finding the median home price for your market and using an online calculator to run different interest rate scenarios. MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

You can see why a higher credit score is important but do you know how to get one?

Make sure that you always make all of your monthly payments on time with at least the minimum amount due. Your payment history is the largest contributing factor to your credit score.

The second largest factor in a credit score is the total amount you owe. Keep your overall debt-to-income (DTI) ratio and your credit utilization ratio the amount of credit you use versus the amount you have available as low as you can.

Finally, check your credit report regularly to make sure there are no errors or signs of fraudulent accounts that could be inadvertently dragging down your score. If you plan to buy a home, check your score 3-6 months before you intend to buy, and periodically until you do buy. You may need time to raise your score and, thanks to Zillow, you now know how much you can save by doing so.

If you believe there is a mistake on your credit report, you can resolve it instantly using our credit correction service.


Photo iStockphoto.com/kosmin

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Originally Posted at: https://www.moneytips.com/your-low-credit-score-could-cost-you-21000-dollars/483

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