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A better credit score can save you a lot of money. But what is a good credit score? A score around 660 and above is good, and above 760 is excellent. A good credit score can get you a good interest rate on personal loans or mortgages. However, a better credit score will cost you less to borrow money.
Case
Sam, whose credit score is 790 and Rita, whose credit score is 640, both applying for a mortgage will get different interest rate offers. Sam receives a favorable interest rate equal to 4.5 percent meanwhile Rita gets 5.5 percent. For a 25-year fixed term, both are getting a $250,000 mortgage loan. The difference in decimals may not be shocking. Yet, Sam ends up paying $166,874 in interest for his mortgage meanwhile Rita ends up paying the sum of $210,565 in interest. There is a difference close to $60K, even if their payment terms are the same, it still costs Sam – whose credit score is better than Rita’s – less to borrow money.
| Mortgage Term (years) | Mortgage Loan Amount (USD) | Credit Score | Mortgage Interest Rate (Per cent) | Total Interest (USD) |
Sam | 25 | 250,000 | 790 | 4.5 | 166,874.36 |
Rita | 25 | 250,000 | 640 | 5.5 | 210,565.62 |
Other factors that determine the interest rate
Of course, when you borrow money, it is not only the credit score that impacts the interest rate. A mortgage’s interests’ rates are impacted by the location of the home, its price, and the loan’s amount. You usually borrow money to pay for the price of your home and the closing costs, without the down payment. In general, you are expected to save for a down payment. The bigger the sum of your down payment, the lower the cost of borrowing will be.
Other factors determine the interest rate calculation. They are mostly related to the loan terms, loan programs, and the interest rate type. It goes without saying that the shorter the terms of the loan, the lower the interest rate will be.
Your Creditworthiness
Your credit score determines your creditworthiness. It reflects your ability to repay and the risk you would carry on the lending institution. When you apply for a mortgage, your lender will average the different credit scores that the different credit bureaus show – the difference in credit score is simply due to the difference of criteria that each bureau uses to calculate your score. The final score will determine whether you are eligible or not to receive the loan, and if you are eligible how costly it will be for you to borrow money.
On the other hand, your debt-to-income (DTI) ratio impacts how the potential risk you carry. Your DTI ratio indicates how much you owe each month compared to how much you earn. A high DTI ratio puts you at risk of not being able to afford to borrow money.
Improve your Credit Score
When you improve your financial health, you improve your credit score. To do so you must start first and foremost by paying your bills on time. Before applying for a loan, assess your creditworthiness by keeping your credit score in check. With Dwello, you can access your credit report regularly and start improving your score by paying your rent. Sign up here on Dwello and begin your credit score rehabilitation journey.