A Simple Credit Hack To Improve Your Credit Score
Getting your credit score is one of the most frustrating things about getting a mortgage. Credit scores play a very instrumental role in the actual rate you get. The lower your score, the higher your interest rate, and the higher your cost of private mortgage insurance. Sometimes, it can even get in the way of you getting the house!
Over the years, I have found many people believe they have perfect credit because they pay all their monthly bills on time. But there's a little secret many people don't know, and that's how managing your revolving credit card balances can impact your credit score more than anything else.
I'll give you a little secret. Pay the bill before the bill is issued!
Your Billing Statement Updates The Credit Report!
When most people receive their bill, they pay it. I hear countless times, “I pay my credit cards off every month as soon as I get the bill.” The problem is, when I get the credit report, I see a large balance, and the credit score reflects that balance. When that credit card company sends you the bill, they also send it to Equifax, Transunion, and Experian. That balance stays on the credit report for 30 days, almost as if you never paid it down!
The key to optimizing your credit score is to pay that bill three days before the statement cycle ends. This brings the balance on that bill to as low as it can be and your credit score as high as it can be. In the old days, paying your bills on time was good enough. If you were not 30 days late on any debt, your score would be in the high-700’s. Today, scores are based more heavily on the percentage of your high credit limit that is borrowed.
You will hear some say, “Do not carry a balance of more than 30% of the high credit for best credit scores” however that is not the complete story. The credit algorithm is quite complex and is based on years of payment history, balances, type of credit (installment vs. revolving), dollar amount, etc. For one person, it could be 50%; for another, it could be 10%!
How Does Your Credit Score Impact Mortgage Rates?
Most mortgage investors have Loan Level Price Adjustments which increase the rate or cost of the rate (points) based on different credit score buckets. With Fannie Mae or Freddie Mac, the difference between a 720 score and a 679 can be as much as .50% in rate and almost as much in PMI. For a $400,000 mortgage, that could be an extra $4,000 per year in additional costs!
We can use our experience and technology to work with buyers to “Rescore” their credit in many situations. Rescores are not always guaranteed, but we can generally tell someone precisely what impact their score will have if they pay down their debt to certain thresholds. This ultimately leads to a higher score and, thus, a lower interest rate!
If you are buying a home, this is one of the most important things to know early in the process. If you have any questions about how your balances impact your interest rate, feel free to contact us anytime.
