In its battle to tamp down inflation, the Federal Reserve
has increased the interest rates banks charge each other, which ripples through other lending markets, including mortgages. Further increases are possible. Are you helpless in the face of these mortgage rate increases? Not necessarily if you maintain a good credit score.
Here’s What You Can Control
You can minimize the effect of rising interest rates by cultivating an excellent credit score. Improving your score can shave hundreds off a monthly house payment. Begin immediately with these steps.
- Make payments you currently have on time, every time. If you have overdue bills, catch them up. If you carry a credit card balance, enact a plan to stop adding to it and start paying it down.
- Find out your credit limit on each card. Set a target to use no more than 30 percent of your limit.
- Do not open any more lines of credit.
- Subscribe to a credit monitoring service. It will make you aware of meaningful changes to your credit score. This knowledge will give you the power to improve your situation.
It takes time to improve a sagging credit score, but it can be done. Once it is elevated, maintaining your score is easier because you will have established good habits.
How Much Difference Can a Good Credit Score Make?
For example, assume a home purchase of $384,800 (the median existing-home sales price as of September 2022
) with a 20 percent down payment, financing $307,840 over 30 years.
A person with a fair FICO score of 620 to 639 would pay an APR of 8.37 percent at current national rates. That amounts to $2,339 in principal and interest per month and $534,099 in total interest paid over the life of the loan. By contrast, a buyer with an excellent credit rating of 760 to 850 would pay an APR of 6.781 percent: $2,003 monthly and $413,237 in interest over the life of the loan.
In this case, an excellent FICO score translates to savings of 1.589 percent in interest, $336 in the monthly payment, and $120,862 over the life of the mortgage. The difference in total mortgage savings between a fair and a great credit score is substantial.
You cannot “fight the Fed” on rising interest rates, but you can fight to keep your interest rate down by building great credit.