With the credit market being so tight, credit score has become the most important key driver of interest rate. The difference between a great credit score and an average credit score could be a half a point or more, and sometimes it can mean the difference between getting a loan and not getting a loan.
Let’s explain how it works. Most lenders pull credit reports from all three credit bureau’s; Equifax, Transunion and Experian. Lenders will then use the middle credit score of the three bureau’s as the basis to select interest rate. The following is an illustration of how score determines rate: A credit score of 740 or above will get the best interest rate. 720-740 a very good interest rate, 700-720 a decent rate and below 700 the rates dramatically decline and in some cases (purchases with only a 10% down payment) a loan may not be available at all unless you select FHA.
Let’s discuss the credit scoring model. While it’s impossible for the average human to figure out how a credit score is determined, I’m certain the bureau’s have a method to their madness. Models used assess risk to determine score. Each credit bureau has multiplerisk scoring models, and these models score differently for different purposes. i.e., a car loan, a credit card, etc. This means that each time a credit score is pulled it could be different. In addition, if an individual pulls their own score, it will most likely be higher than when a lender pulls credit because individuals pulling the score are pulling from a system that is using a different scoring model. See what I mean, it’s impossible to really figure it out.
However, the good news is a buyer can control their credit score if they pay attention to it. EVERYTHING affects your score and everything affects it differently. Medical bills; you may think the $28 medical bill that you didn’t pay doesn’t have much effect, but it’s not the dollar amount, it is the fact that you didn’t pay it, that makes the score go south. Lease payments, make sure you turn in your lease on time and pay anything outstanding, or the leasing companies will report you, and what happens to your score is not pretty.
In closing this segment, it’s important to pull your credit at least once a year and see if there is anything you need to fix. Pay everything on time and don’t trust interest rates given to you over the internet, because they mean nothing if they don’t know your situation. Remember it is the type of property, type of occupancy, down payment and credit score that determine rates, not the internet.