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Your credit score determines the amount you pay for a mortgage. Bottom line is the higher your score, the lower your interest rate, and the less you pay for your home over the life of your mortgage.

Banks use your credit score to determine your risk as a borrower. The lower your credit score, the sketchier the bank finds your financial history. Low scores don’t mean you’re ineligible for a mortgage, but you’re probably going to pay a lot more for your monthly mortgage.

What The Numbers Mean

A sample of current Bankrate numbers shows you how much your credit score directly affects your monthly mortgage payment and the difference you’ll pay over the life of a 30-year fixed-rate mortgage with a loan of $300K:

FICO Score APR Monthly Payment Total Interest Paid Difference In Cost of Mortgage
760-850 4.84 $1580 $268,926 A score change to 700-759= $14,610 more
680-679 5.45 $1694 309,693 Increased score of 699-680 = $14,383 savings
640-659 5.89 $1775 $339,068 Increased score of 660-679 = $29, 375 savings

This table is a real eye-opener. Comparing a credit score of 760 to 640 tells us that an increase of just over one percentage point of interest translates to $200 more for your monthly mortgage and $72,000 more for the total mortgage!

How Can You Improve Your Credit Score?

Don’t let a low credit score discourage you. If you’re ready to buy a new home, chances are good you’ll find a lender who’s willing to work with you. Most bankers understand that life happens and even the best-laid plans can go awry, so keep an open mind and a positive attitude when negotiating terms for your mortgage, and don’t forget there are things you can do today to start building better credit.

Creating better financial habits is simply that: starting a habit. Past credit history is the largest component of what banks consider good credit and it comprises 35% of your credit score. Don’t underestimate simple routines like paying every single bill on time every month.

The second highest component of your score is managing your available credit. Lenders consider credit usage of between 10 and 30% a good indicator of how well you manage your credit usage.

Pull your credit report and review your open accounts. Consolidate credit cards when you can and if you can’t do that right now, start paying the largest amount per month that you can afford on the smallest credit card balance until it’s paid off. Once that one is paid, close that account and start knuckling down on the smallest balance.

The Bottom Line

No matter where you’re starting on your credit journey, you’ll find a lender to finance your home mortgage. It’s not going to happen overnight, but if you’re patient and diligent, an improved credit score is right around the corner for you.

Your incentive is securing a loan that saves you the most money. What are you waiting for?