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Why Your Credit Score Is Important

By
Real Estate Technology with New England Home Buyers

Your credit score determines a lot more than what loans you can get or the interest rates you pay. You can use a great credit score to get great deals — on loans, credit cards, insurance premiums, apartments, and cell phone plans. On the other hand, a bad credit score can hammer you into missing out or paying more.
When you build and maintain strong credit, lends will have greater confidence to qualify you for a mortgage, because they can see that you’ve paid back your loans as agreed and that you’ve used your credit wisely. Good credit also means that your lender will be more open to approving you for a mortgage that has more favorable terms and a lower interest rate.

Your Credit Report

According to Investopedia, a credit report is a detailed breakdown of an individual's credit history prepared by a credit bureau. Credit bureaus collect financial information about individuals and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicants' creditworthiness.
In simpler terms, your credit report is a record of the money you've borrowed, your history of paying it back, and how much open credit is available to you. This information is very important to lenders, and they rely heavily on this as it tells them your creditworthiness and the likelihood that you'll repay your mortgage and on time.
A credit report typically contains:

  • A list of debts and a history of how you've paid them, including credit cards, car loans, and student loans.
  • Any bills referred to a collection agency, such as utility or medical bills that you did not pay or paid significantly late.
  • Public-record information, such as tax liens and bankruptcies that may be linked to you.
  • Inquiries made about your creditworthiness, showing how many inquiries were made about your credit and if you were given credit based on the inquiry.

Under federal law, you have a right and are entitled to get a free copy of your credit report from each of the three main US credit bureaus — Equifax, Transunion, and Experian — once every 12 months. It's recommended for you to review your credit report before applying for a mortgage in case there are inaccuracies you need to correct.

Your Credit Score

A person's credit score is a number between 300 and 850, with 850 being the highest credit score possible. According to Investopedia, your credit score is important because it can impact many financial transactions including mortgages, auto loans, credit cards, and private loans.
Your credit score helps lenders decide how likely you are to repay your debts, and it plays a significant role when securing a mortgage. Your credit score is based on 5 things:

  • Your payment history and ability to repay your debts on time, as late payments will lower your credit score.
  • The amount of total debt you owe, including credit cards, student loans, and car loans. If your credit cards are at their limits, this can lower your credit score — even if the amount you owe isn't large.
  • How long you've used credit and how you’ve managed it. If you show a pattern of managing your credit wisely, keeping credit card balances low, and paying your bills on time, your credit score will be positively affected.
  • How often you apply for new credit and take on new debt. If you've applied for several credit cards at the same time, your credit score can go down.
  • The types of credit you currently use, including credit cards, retail accounts, installment loans, finance company accounts, and mortgages.

Your credit score is especially important when applying for a mortgage, as even a few digits can change how good of an offer you’ll get.

Credit Rating

Mortgage Interest Rate

Monthly Payment

720-850

5.49%

$851

700-719

5.61%

$862

675-699

6.15%

$914

620-674

7.30%

$1,028

560-619

8.53%

$1,157

500-559

9.29%

$1,238

In general, the higher your credit score, the more options will be available to you — including better loan terms and a lower interest rate.
By understanding your credit and how your credit score is affected, you’ll be on the right path to realizing your goals. Remember that your credit score and history changes over time, so you’ll need to check on it regularly and continuously work to keep it strong.

 

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