Ask Our Broker With Peter G. Miller: Low Options
Question:
We are about to buy a first home but our credit score is weak. How much will we be penalized for a low score and what can we do about it?
Answer:
The question is how much of a penalty will you pay for low scores. There is actually an online calculator from Fair Isaac that looks at current interest rates and allows you to see how much more or less you might pay for financing depending on your credit status (http://bit.ly/ctwcredit).
As this is written, the calculator estimates that for a $200,000 mortgage, if you have a score between 760 and 850, you will have an interest rate of 4.149 percent. Your monthly payment for principal and interest over 30 years will be $972.
Alternatively, if you have a score between 620 and 639, you will face a far higher cost each month for the same mortgage amount, $1,166. This happens because the calculator estimates that your interest rate will be 5.738 percent.
That’s a difference of $194 a month or $2,328 a year, essentially a penalty for poor credit.
What can you do to avoid steep credit costs?
First, you have to look at your income and expenses. That means you have to develop a careful list of what you take in and what you spend. Do this every week and you’ll soon be able to see two things: where your money goes and whether expenses exceed income.
Second, once you have some numbers you can then map out a budget. What expenses can you reduce? Small changes like eating at home more often can make a big impact.
Third, in the credit world it’s enormously important to pay bills on time and in full. You control this measure. Make a point of paying bills early to avoid late charges and credit dings.
Fourth, your credit scores are based on the information found on your credit report so take a good look at the report itself. You can get a free copy at AnnualCreditReport.com. This is a site authorized by federal law and when they say “free” that’s exactly what they mean. There is no charge or requirement to buy other services.
Look through the report very carefully. Make sure all the identification information is correct such as where you live and the proper spelling of your name. Then go through the report and look for items that are factually incorrect or out of date. In most cases items should be removed after seven years, 10 years for bankruptcies. If you see old or incorrect information contact the credit reporting agency and ask to have the item removed.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
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