Understanding My Credit

When you’re applying for a home loan, lenders are going to take a peek at your past. If you want a decent interest rate I’m afraid it’s unavoidable. But what do they look at? Well, the main piece of information they’ll study in detail is your credit report, most importantly, your FICO credit score (a three digit figure arrived at by looking at your past credit performance).

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So, if I needed to apply for a mortgage, understanding my credit score would be one of the most important factors in figuring out what kind of interest rate a lender would be prepared to offer.

A lot of us have a few credit problems in our past that we’d like to forget. Maybe it’s simply a few missed payments on a credit card. Maybe it’s even a loan default or bankruptcy. However serious or frivolous, all of these things will affect your credit rating. They will also affect the way lenders assess the risk of lending money to you.

As a general rule, the lower your credit (or FICO) score, the higher the interest rate you will have to pay. It isn’t the only factor involved in deciding your interest rate, but it is a biggie. Take a look at this example, based on statistics from thousands of US lenders:

If your FICO score is 720-850 (excellent credit)

If you borrow $200,000 on a 30-year fixed term in California, you could expect to receive an APR of 6.646%. Your monthly payment would $1,283, and your total interest over the life of the loan would be $262,024.

If your FICO score is to 675-699 (good credit)

If you borrow the same $200,000 over the same term you would be offered something like 7.311% APR. Your monthly payment would be $1,373 and your total interest over the life of the loan would be $294,149.

So, you can see that simply moving from an excellent credit rating to a mere good, could cost you an extra $90 a month and over $32,000 extra interest in the long run. If your credit score dropped into the region of fair you could expect to pay anything up to around $90,000 more over thirty years than a borrower with excellent credit.

Clearly, then, one of the best methods to ensure a good interest rate in the future is to protect your credit score in the present. If you’ve already damaged your credit, start working to repair it now before it costs you a fortune.