If you're looking to purchase a home, either in 2020 or beyond, take a look at your credit score now. It'll play a key role in the kind of mortgage rate you'll be eligible for.
The better your credit score, the lower the mortgage rate you can qualify for.
Your credit score is a number that lenders use to determine your creditworthiness, to decide whether they want to give you a loan and what kind of interest rate to offer. It's based on information in your credit report, which is a record of how you've managed your credit in the past, how much debt you carry, and whether you've made your payments on time.
A few months before you begin searching for your perfect home, review your credit report to catch any missed bills or errors that could hurt your score. You can access your report at AnnualCreditReport.com.
Then, take a look at your current credit score. You can check your score by using one of two methods. Some banks and credit card issuers, including Chase, Capital One, and American Express, provide their customers with access to a free credit score on their monthly statements or in their account online.
If your bank doesn't offer this service, third-party sites including Bankrate.com, CreditKarma.com, and Credit.com offer free credit scores, along with a summary of your payment history, personalized tips, and financial tools.
Your FICO score, which most lenders use, ranges from 300 to 850. To get a great rate on a mortgage, which will save you lots of money in the long run, it helps to have a score of 760 or higher.
It should be noted that even with a lower score than that, you may still qualify for a loan. However, your interest rate will be much higher than a homebuyer with a higher credit score.
Graphic by Kiersten Schmidt
Say your credit score is around 625 and you're planning to take out a mortgage for $200,000 (which is the median price for a home in the United States). With current rates around 5% for someone with that score, your monthly payment would be about $1,075, and you'd pay more than $187,000 in interest over the life of a 30-year fixed rate mortgage, according to FICO's loan savings calculator.
However, if your score is between 700-759, you could get a rate closer to 3.7% and a monthly payment of about $915. Over the life of the loan, you would save almost $58,000 in interest.
Video by Ian Wolsten
Remove the hassle of remembering to manually make your credit card payment every month by opting into auto-pay and having your credit card issuer automatically withdraw the funds from your bank account. This way, your credit score will never take a hit because of a forgotten payment.
Matt Schulz, chief industry analyst at CompareCards.com, says you should also aim to keep your utilization rate low. This is the ratio between how much you owe on a credit card compared to the available credit.
Above all, Schulz told Grow earlier this year, the most important step in boosting and maintaining a good credit score is making your payments on time: "Making that payment on time each month is the single biggest factor in credit scoring."
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