How Does a Low Credit Score Affect My Interest Rate?
Lenders estimate your ability to pay back money based on your credit score. The
risk factor they take on is built-in to your i n t e r e s t r a t e a s a f i n a n c i n g f e e .
Therefore, a low credit score results in a higher interest rate, higher monthly fees,
and a higher amount of interest being paid over the total life of the loan. A borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment.
The following chart illustrates the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios. A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7,214 per year, and approximately
How Does the Underwriter View My Score?
If you are considering a home purchase, it is in your best interest to make every effort to
increase your credit score, especially if you know you have issues you should be dealing
with. It is often the case that people are not aware of bad marks on their credit record until they apply for financing for a major purchase, such as a home. As part of the loan process, we run a credit report for you. But you can take advantage of the opportunity to get a free credit
report from each of the three main CRAs: Equifax, Experian® and TransUnion®.
As a sidebar, you can choose to get the free report from all three bureaus at the same time, so you are aware of what information each bureau has collected. Another option is to pull your credit report from one agency, and reserve the right to get your free reports from the other two CRAs as you work on improving your credit standing. We believe it is best to have the full overview up front.
Different CRAs have different methods of calculating these scores, and may also have different information contained within their findings.
Consider the adage, “Why jump over nickels to pick up pennies?” If additional reports are needed within a 12-month period from any of the three CRAs, the cost is extremely minimal compared to the potential savings that can be realized by an improved credit score, and if you run a credit report on yourself it will not affect your own score as an inquiry.
The underwriter who is making the decision as to whether or not you should get the loan you are asking for will generally look at the scores generated from all three CRAs. Typically, the score will not be the same from all three reports, and the underwriter will consider the middle score as a barometer.
Disputing Errors On the Credit Report
If you are in the process of reviewing your credit reports, the first thing to do is make
sure that the information contained within the reports is correct. In June 2004, The
U.S. Public Interest Research Group published the results of a survey it
conducted involving 200 adults in 30 states to test the validity of credit reporting.
Their findings were as follows:
- Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;
- Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;
- Fifty-four percent (54%) of the credit reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;
- Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.
SOURCE: U.S. Public Interest Group Research; One In Four Credit Reports Contains Errors Serious Enough To Wreak Havoc For Consumers, US PIRG Press release, 06/17/04
If you find that you have errors on your credit report, follow this
procedure to correct those errors.
- Make a copy of the report and circle the item(s) you are questioning. Keep your original copy for your own records.
- Prepare a letter to the CRA that provided you with the report in question, and request to have the erroneous item(s) removed. If you have proof of payment for an item in question, include a copy of that documentation.
- Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error
reported to the CRA, state why the claim is inaccurate, and include any relevant documentation to prove your point.
- Send your correspondence via certified mail.
You should receive a response from the CRA within 30 to 45 days.
If the error has been corrected, they will send you a fresh
copy of your credit report at no charge to show you that the item
has been removed. They will also send a corrected report to any
entity that received a report that contained errors within the last six
months. If you cannot have a disputed item removed, you have
the right to include your side of the story on the credit report. Your
statement should be a concise explanation (100 words or less) as
to why you are challenging the item in question. From that point
on, this notation will be included in your credit report as long as
the item in question remains on your report.