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How a credit score can affect the mortgage interest rate

Home sale sign.

Home sale sign. Photo Credit: AP

Every 20 points you add to your credit score above 620 can reduce your annual percentage rate for a 30-year fixed mortgage by about .12 percent. For a $300,000 home, that’s a $6,400 savings over the life of a 30-year loan. That’s according to the results of a survey by Zillow Mortgage Marketplace, an online lending exchange where borrowers submit anonymous loan requests and receive quotes from lenders.

Zillow analyzed the borrower requests and lender quotes for the first half of September. Borrowers with scores below 620 were out of luck – they didn’t even get enough quotes to calculate an average. Data from Fico.com indicates 29.3 percent of Americans fall into that category. A score just above 620 will get you a quote of about 4.9 percent. Those with a pristine score of 720 or above – 47 percent of Americans -- were quoted an average 4.3 percent APR for a 30-year fixed mortgage.

But for the borrowers in between those two extremes, every 20 points made a difference in the quotes they received.

So how hard is it to raise your score by 20 points?

“If you’re between 620 and 720 already, that means your credit is in OK shape. There are a couple of different things you could do to pull up your score fairly quickly,” says Sarah Fouquart of Greenpath Debt Solutions in Jericho. Here are two steps you can take that might nudge your score into a more favorable bracket in about a month:

Check your credit report. “Before you even start shopping for a mortgage, you should pull a recent report,” Fouquart says. “If you find information that’s either old or incorrect, or doesn’t belong to you, you send a written dispute to the credit bureau. Sometimes for people who have common names, the creditor might confuse you with someone else,” she says. “Depending on the information, that could make a big difference,” in your score, she says. The credit bureau has to complete the investigation in 30 days, so you should get a result pretty quickly, Fouquart says.

Increase the gap between your debt and your spending limit. “If your balance is high relative to your limit, that can pull down your score. People feel overwhelmed, but it’s not necessarily paying everything off. Just paying the balance down can make a difference." says Fouquart. Keep your debt at not more than 30 percent of your limit, advises Susan Lagville, executive director of Housing Help, Inc. in Greenlawn. “The closer you get to 50 percent, the worse off you are,” Lagville says. Creditors make monthly reports to the credit bureaus, so once you get your debt down to a healthy level, it should only take a month for the change to be reflected on your credit report, Fouquart says. The formula for calculating your score is intentionally complex, since it’s meant to show a pattern of behavior. But “Something like that could make a 10 to 20 point difference, depending on what other factors are going into the formula,” Fouquart says.

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