The cost of a low credit score

The other day I was putting a package together for a client and discussing interest rate options. They have been looking at options and have been inundated with offers with great rates and promises. Their credit scores were in the mid 600’s so they would qualify for an FHA mortgage, however due to their scores not being above the 720 mark the lender adds points to the offered rate. As I was explaining this to them I realized that they had no idea how their credit scores impacted their ability to obtain the best interest rates.

In the early to mid 1980’s credit scoring began to take hold as models were developed to establish parameters for determining the credit worthiness of an individual. Prior to credit scores lenders were making their decisions based upon opinions of your credit worth using the 5 C’s of Credit (Character, Capacity, Collateral, Capital, Conditions). Over the past thirty years the scoring models have become more sophisticated and elaborate. Today their isn’t too much you can do with respect to borrowing money, opening accounts, and getting insurance that doesn’t revolve around a credit score. Unfortunately, many people don’t realize the impact of a low credit score on decisions and offers they receive.

It is possible to add 2 to 3 percent on to your mortgage interest rate due to a low credit score, which on a 100,000 loan could be as much as $175.00 to $200.00 per month in additional principal and interest payments. If you are looking at a program that is greater than 80% loan to value other than FHA the cost of your mortgage payment insurance is based upon your credit score. In today’s market a score less than 700 will disqualify you from those programs. Credit score right or wrong, low or high, justified or unjustified will be a determining factor in credit decisions.

What you can do is be prepared prior to applying for any type of loan or account. Get a free credit report from the credit bureaus (Trans Union, Equifax, and Experian ) and review the information, both positive and negative. Verify all information on the report this is your report card on the financial side of life. You will be offered a credit score if you pay for it, don’t do it. Just verify the information for accuracy. Your credit score will change on a daily basis and is a point in time reflection of your chance of defaulting on a loan in the next 24 months. Furthermore, every reporting agency will have a different score and it is subject to their model.

If you find an error on your credit report you have the right to dispute the information either online or by mail. There are several credit repair companies that can help you as well. The process can be tedious if have many errors but follow through and organization will help guide the way.

My last piece of advice prior to completing any application for employment, housing, utilities, and auto/home insurance is know what is on your credit report. Not knowing will be costly. For more information please contact me at jimd@dmiindiana.com.