The housing market in New Hampshire is very attractive to many. Beautiful three and four bedroom homes in great neighborhoods near excellent schools and amenities can be found in the $350,000 range. In some cases, an investment of this size can even get you into a new construction home that can be customized to your needs and tastes, with all the modern fixtures, appliances, and warranties you’d expect from a new home.
Of course, your credit score will have a significant effect on how much you’ll pay monthly and over the course of the term for your home. Start by requesting a copy of your credit report from Equifax or TransUnion. There is a small fee associated with it.
How Your Score Affects Your Mortgage
According to the loan savings calculator on MyFICO.com, you would be paying an extra $115,000 or more in interest costs on a 30-year fixed mortgage of $350,000 if your credit score was between 620 and 639 than if your score was above 760. Your monthly mortgage payment would also be roughly $330 higher.
Thankfully, there are ways to improve your credit score. Today, we’re going to examine one thing you can do that can have a huge benefit on your mortgage. We’ll look at more strategies in upcoming blogs.
Your Credit Utilization Ratio
Although the exact formula FICO uses to determine your credit score is an industry secret, it’s widely accepted that roughly 30% of your score is derived from your current credit utilization ratio.
The credit utilization ratio is the amount you owe compared to the credit limit available. When someone charges too much on their card or maxes it out, they are perceived to be a higher credit risk and therefore get a lower credit score.
What’s Your Credit Card Utilization Ratio?
To calculate your credit card utilization ratio, divide the current balance owed by the credit limit associated with that card. For example, if you have a balance of $1,000 on a card with a $5,000 limit, the credit card utilization ratio is 20%.
When determining your credit score, FICO looks at the individual utilization ratio of each of your credit cards as well as the overall ratio of all your credit cards combined. You can calculate your overall credit card utilization ratio by adding up the balance owed on all of your cards and dividing it by the total of the credit card limits on those cards.
Since they look at both the individual credit card utilization ratios as well as the overall utilization ratio, obtaining a new credit card and keeping it at a zero balance will not be an effective way to counter the negative effects of other cards with high ratios. Instead, experts agree that maintaining a balance below 30% on each of your cards is your best bet.
To help ensure you maintain a good utilization ratio consider implementing one or all of the following practices:
- Set up automated email alerts to notify you when your credit card balance exceeds 30%
- Check your credit card balances online frequently
- Make payments more frequently than once a month
- If your credit score is good enough to qualify and you won’t be tempted to allow your balance to creep upwards, request a higher credit limit from your credit card issuer. When you get an increased credit limit, your utilization ratio automatically is lower. Be careful on this one, though, as a ‘hard inquiry’ on your credit could have a temporary negative effect on your score. Ask whether the creditor will need to perform a hard inquiry before requesting a limit increase, and weigh your options.
In our next blog, we’ll look at how you could save as much as $100,000 on your mortgage by doing just one thing.