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Raise Your Credit Score—Lower Your Mortgage Interest Rate!

Posted In:  mortgage

So you are ready to buy a new home huh?  Have you taken the time to check out your credit report?  If your answer is no, then the very next thing you need to do is get a copy of your credit report to ensure it is completely accurate.  Having incorrect or detrimental information on your credit report can cost you tens of thousands of dollars.  The difference in interest paid on a $200,000 mortgage between a 4.5% and 5% 30 year fixed mortgage is $21198.15! 

            Now that you have that $20,000 figure hanging over your head if there is a problem with your credit report, let’s see what you can do to raise that credit score and clean up your report.

  • Stop racking up new debt!  This might seem like something that doesn’t need to be said, but between now and the day you apply for that mortgage, you want to increase your credit score, and to do that you need to add as little new debt to your credit profile as possible.
  • Pay down your current credit debt.  One of the most important factors of your credit score is your debt to limit ratio.  Keep those credit card balances to 25% or less of the total limit if at all possible.
    • There are a myriad of different way to going about this, but here are a few tips:
      • Make a spreadsheet of your debt and interest rates.  Write down your interest rates, balances and limits.  This way you know exactly what you are looking at and each time you make a payment you can see the progress you are making!
      • Call your credit card companies and ask for a better rate.  They may say no, which is fine as it did not cost anything to ask.  But if they do lower your rate, then that is more money you can use to pay down your debt instead of paying off interest!
      • Snowball your payments.  This means paying off one card at a time.  Make your minimum payments on all cards, then allocate all other money towards paying down your highest interest card.  Once that card is paid off, focus on the next highest interest card, and so on until you are out from under your credit debt!
  • Do not apply for new credit cards or loans.  Prospective lenders will not look kindly on your credit profile if you appear to be taking out new lines of credit and overextended yourself.  These credit inquiries stay on your report for two years, so if you don’t need to apply, DON’T!
  • Do not close your credit accounts.  You may think that closing out all of those credit cards is good for you, but it can work against you in two ways.  First, if you have had these cards open for several years, it will negatively impact your length of credit history, making you less appealing to your potential new creditors.  Second, if are carrying a balance on another card, the available balance on the card you are thinking about closing is helping to lower your overall debt to limit ratio.
  • Correct any inaccurate information.  If there is anything on your credit report that is incorrect, do your best to fix it immediately.  Escalate any necessary forms to the credit agency who is reporting the inaccuracy.
  • Negotiate any negative information.  If you have a bankruptcy listed on your report, there is little you can do other than wait the appropriate amount of time.  However if you have something small like a late payment, attempt to contact the lending agency, and the reporting agency to see if there is anything they will do for you.  Remember, asking doesn’t cost you anything, and the worst thing they can say to you is no!

Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email jessica@savingtools.com. Thanks!

 

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