A good credit score can save home buyers hundreds of dollars a month on mortgage payments — and potentially tens of thousands over the course of their loan.
A high credit score gives lenders confidence in your ability to repay your loan. The higher it is, the lower the interest rate they’ll be willing to give you. For a mortgage, in particular, which is likely the biggest loan most people will take out, a high credit score is the ultimate money saver.
FICO credit scores are most commonly used by mortgage lenders, and range from 300 to 850. Anything between 700 and 749 is typically deemed “good,” while scores from 650 to 700 are “fair.” Excellent scores are over 750. The median credit score of home buyers qualifying for a mortgage in the first quarter of 2019 was 759, according to the Federal Reserve, and 75% boasted a score over 700.
You don’t need a score above 700 to buy a house, though a higher credit score will typically mean you’re given a better mortgage rate and loan options. Just how much will increasing your score save you? Here’s how to figure it out.
How much you can save you if you raise your credit score
Even a seemingly small improvement in your score — say, from 680 to 700 — could save you thousands of dollars.
Here’s how much you would pay each month on a 30-year fixed mortgage, using the median home price of $266,000 and the MyFICO mortgage calculator:
That’s a difference of $89,804 between a top tier and bottom tier score.
Remember, there are countless other factors that also play a role in the mortgage-approval process, including the cost of the home, the size of the down payment and your income.
How to improve your credit score
The most important thing you can do to increase your credit score is to make your payments on time and in full each month. Payment history makes up 35% of your score, the largest proportion of the five factors that credit bureaus consider.
If you have trouble paying on time, set up automated payments for at least the minimum balance each month (and ideally for the full amount you owe so you don’t start racking up debt).
Make sure you are not using up too much of your credit lines at any one time. Your credit utilization ratio (CUR) makes up 30% of your score, and experts recommend keeping it at 30% or below. So, for example, if you have a credit card with a $10,000 limit, you want to charge no more than $3,000 at any one time. Making periodic payments throughout the month can help you keep it in line with the recommended limit.
Keeping your oldest credit accounts open can give you a boost, as length of your credit history comprises 15% of your score. It’s also important to limit how often you apply for new lines of credit, because the number of credit inquiries makes up another 10% of your score. Finally, the mix of different types of credit accounts for the final 10%.
There are plenty of apps that track your score and send updates, including many bank apps, Credit Karma and Mint. It only takes a few minutes to sign up, and it can help save you tens of thousands of dollarsif you’re planning to buy a house some day.