Past 720 credit score, rates drop little
NEW YORK » Have you been working to boost your credit score before trying to get a mortgage? It may not yield the reward you expect.
The mortgage loan interest rates offered to borrowers with stellar FICO scores aren’t much lower than the rates offered to those with a middle-of-the-road 720 score these days.
That means that efforts to drive up a credit score to lofty heights aren’t likely to produce substantial savings over the life of the loan.
The real savings comes from getting your score to that magic line of 720.
An analysis of interest rate quotes made through real estate website Zillow.com during the first half of September found that prospective borrowers with FICO scores of 620 or below aren’t likely to get any mortgage offers. "These lenders are really not looking at people under 620 at all," said Stan Humphries, chief economist for Zillow.
That means well more than a quarter of U.S. adults have little or no access to mortgage loans right now, based on the most recent distribution of scores provided by FICO. That’s because credit remains tight, and banks, which have written off billions in bad loans in the past three years, are trying to keep their risks low, so they’re bypassing the
diciest borrowers. "As the housing market continues to improve over the next five years, then this situation will also change," Humphries predicted.
Ahead of asking for mortgage, boost rating by paying debts on timeIf you’re planning to apply for a mortgage or other consumer loan in coming months, you’ll get more offers and lower interest rates with a solid credit score. Here are some tips for improving your score before you apply: Carefully read your credit reports from all three credit reporting agencies: Equifax, Experian and TransUnion. Each is legally required to provide one free report per year. You can get yours through www.annualcreditreport.com. Check all three reports to make sure personal information such as your Social Security number is correct, every line of credit is actually yours and payment data is accurate. If you find anything incorrect, contact the agency to have it removed. Correcting a mistake that’s dragging your score down can make a significant difference. Make sure all of your loan, credit card and other bill payments are on time. Setting up automatic payments for at least the minimum will ensure that you don’t miss future payments. Pay down your balances. One factor in your score is your utilization ratio, or the amount of available credit you’re using. Paying off a substantial portion of your credit card debt may reduce your ratio enough to raise your score and allow you to qualify for a better mortgage rate – enabling you to possibly save much more than your original debt over the course of your mortgage. Don’t apply for additional credit. Adding a new car loan to your report can temporarily cut 20 points from your score, for instance, so if you’re planning to buy a house in the next few months, hold off on seeking any more credit. Don’t close old accounts. Even if you haven’t used a credit card in some time, shutting down the account can hurt your score. The length of your credit history factors in a score, and reducing your available credit will increase your utilization ratio. Associated Press
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For potential borrowers with scores between 620 and 720 – roughly another quarter of U.S. adults – the lowest annual interest rate offered by lenders through Zillow.com shows the impact a few credit score points can have:
» For scores between 620 and 639, the best average annual percentage rate offered was 4.9 percent.
» For scores between 640 and 659, the rate was 4.73 percent.
» For scores between 660 and 679, the rate was 4.6 percent.
» For scores between 680 and 699, the rate was 4.56 percent.
» For scores between 700 and 719, the rate was 4.44 percent.
» For scores of 720 and above, the rate was 4.3 percent.
That means that for each 20-point score increase, the average rate dropped 0.12 percent. On a $300,000 home with a 20 percent down payment, a 0.12 percent decline equals about $6,400 saved over the course of a 30-year mortgage, according to Zillow. The company looked at 25,000 loan requests and the quotes they garnered from its pool of 1,000 lenders to come up with its data.
"If you’re between 620 and 720, you should be killing yourself to get every point you can," Humphries said.
But if you’re already at 720, the benefits start to dwindle as you improve your score further. There are still incremental rate reductions for borrowers in the higher range, but they won’t see the same level of drop-off that improvements lower on the scale can produce.
Part of the reason for so little change for the top borrowers is that interest rates are so low overall. "There’s not that much room right now between the rates," noted Diane Winland, a
financial planner with
Financial Finesse, based in Manhattan Beach, Calif.
Another potential factor is that consumers with "perfect" credit scores tend to be less profitable for banks than consumers with a few dings on their histories, who pay higher rates and often penalties like late fees.
Consumers with great scores by and large avoid credit, explained John Ulzheimer, president of consumer education for the website Credit.com. "They have credit, they have had credit for a very long time, but they’re definitely a small-time user of credit. Which means that they’re not very profitable."
