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It’s common knowledge that your credit score affects your ability to qualify for a mortgage. What’s less well-known is how much your credit score affects the interest rate you’ll pay.
What Is a Good Credit Score?
Credit scores are typically depicted as ranges that are categorized as poor, fair, good, and excellent. A good credit score is generally considered to be 700 or above.
Credit scores help lenders assess the risk of lending money to an individual. A higher credit score usually indicates a lower risk, making it easier to access loans with favorable terms, lower interest rates, higher credit limits, and increased chances of approval for mortgages or credit cards.
For many years, a FICO credit score of 720 or above gave you access to the best mortgage rates. Unfortunately, that’s no longer true. These days, most lenders demand a score of 740 or even 760 before a borrower can qualify for their lowest mortgage rates.
How Do Credit Scores Affect Mortgage Rates?
Let’s look at how mortgage rates change (on average) depending on your credit score.
|2024 Mortgage Rates by Credit Score
|Average Mortgage Interest Rate
|760 to 850
|700 to 759
|680 to 699
|660 to 679
|640 to 659
|620 to 639
According to Fair, Isaac & Co., which developed the FICO credit scoring system, the best interest rates are currently available to borrowers with scores of 760 and above, up to a “perfect” score of 850 on the FICO system. Just below that, borrowers in the 700-759 range can expect to pay about 0.2 percentage points more (20 basis points) on a 30-year fixed-rate loan, all other things being equal.
From there on down, interest rates jump for every 20-point decrease in credit score. The interest rate increases by roughly 0.2% for each additional drop to the 680-699 range and 660-679.
When your credit score drops below 660, the increase is more than twice as big, with a 0.43 percentage point increase for borrowers in the 640-659 range. Below that, you can tack on roughly another half percent for borrowers with scores from 620-639, although many lenders will decline clients with scores this low.
Some lenders will still make loans for borrowers with credit scores below 620, but there are relatively few. If you are approved for a mortgage with a score below 620, you’ll likely need a sizeable down payment, or a large amount of equity in your home if you’re refinancing.
» MORE: See today’s refinance rates
How Much do Credit Scores Affect Mortgage Rates?
As you can see from the table, credit scores can determine your mortgage rate by up to 2 interest points. Let’s work through an example so you can see how much a higher interest rate affects your monthly payment.
Consider a $300,000 conventional loan where you’re making a 20% down payment of $75,000.
Under recent market conditions, a borrower with a 740 credit score could get a rate of 6.9% percent with no points on a 30-year fixed-rate loan. This would mean a monthly payment of about $1,976.
To obtain the same loan terms, a borrower with a 620 credit score would have to pay 4.14 discount points to get the same rate – adding $12,420 in closing costs. Alternatively, the borrower could obtain a loan with an 8.134% interest rate, meaning a monthly payment of $2,267.
That might not seem like a huge difference in monthly payments, but an extra $291 a month works out to nearly $104,760 over the course of the loan.
If you don’t have a good credit score, you are likely better off waiting on the sideline to improve your credit. Mortgage rates on conventional loans go up in steps as credit scores decline. If a check on your credit score shows you’re just below a cutoff, a slight improvement could save you a lot of money.
How to Check Your Credit
When you’re trying to obtain a loan for a mortgage or any other big purchase, keeping up to date on your credit report and credit score is vital. Here are a couple of free ways to check your credit:
- Credit Card Companies & Banks: Many credit card companies and banks now include free credit score checks as a part of their services. You can typically check this number when you log onto your online account (via browser), through the bank’s mobile app, or on your monthly statement. When you check your credit score through a banking account, you should see your most recent FICO score (updated monthly) and which credit reporting agency it came from.
- Credit Reporting Agencies: You can get a free credit report once a week from each of the three major credit bureaus (Experian, Equifax, and TransUnion) through annualcreditreport.com. This is the only website authorized by federal law to provide free credit reports from each of the three major credit bureaus.
Credit Report vs. Credit Score
A credit report is a comprehensive record detailing your credit history, encompassing payment history, account information, inquiries, and public records. Meanwhile, a credit score is a numerical representation distilled from this report, condensing your creditworthiness into a single number. While the report offers a detailed view, the score provides a quick snapshot of your credit health, helping lenders assess the risk of extending credit.
It’s a good practice to regularly monitor your credit to stay informed about your financial health and to detect any potential errors or fraudulent activity.
How to Improve Your Credit Score
There’s no easy, quick fix to improve your credit score. But here are some tips to get you started:
- Pay Bills on Time: Late payments can significantly impact your score. Ensure all bills (including credit card payments), loans, and utilities are paid on time.
- Reduce Credit Card Balances: Aim to keep credit card balances low relative to your credit limits. Lowering the utilization rate can positively impact your score.
- Limit New Credit Applications: Multiple credit inquiries can lower your score. Be selective when applying for new credit and avoid opening multiple accounts within a short period.
- Regularly Check Your Credit Report: Review your credit report for errors or inaccuracies that might impact your score. Dispute any discrepancies you find.
- Keep Old Accounts Open: Closing old accounts can reduce your overall available credit, potentially affecting your credit utilization ratio. Keep these accounts open to maintain a longer credit history.
- Diversify Your Credit Mix: Having a mix of different types of credit (e.g., credit cards, loans) can be beneficial as long as you manage them responsibly.
- Become an Authorized User: If possible, becoming an authorized user on someone else’s credit card with a good payment history can positively impact your score.
Improving a credit score takes time, but consistently practicing these habits can gradually boost your score. Remember that it is worth the wait. A healthier credit score can be the difference between spending tens of thousands of dollars on your mortgage.