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Mortgage Loans: Why Your Credit Score Matters

Crystal Rem's picture

June is National Homeownership month, so we are bringing you a series of blog posts to help demystify the home loan process. Today’s topic:

Why Your Credit Score Matters

You know it is important to have a “good credit score,” but why? The answer is simple:

Your Credit Score Plays an Important Role in determining how much your mortgage will cost you.

Without a good (read: high) credit score, you could end up paying thousands of dollars more for your mortgage because the lender is taking on more risk to loan the money to you. The better your credit score, the more confidence the lender has that you will be able to pay back the loan, so the more favorable the terms will be that they can offer you.

The table1 below demonstrates the relationship between your credit score and the rate and that effects what you end up paying for your mortgage.

table showing the relationship between credit score and rate

Lenders look at more than just your credit score.

Your credit score is only part of the equation. Lenders will also look at your credit report, credit history, assets and income, so make sure you have everything in order, but the credit score is key to locking in lower rates so it is worth the effort of improving your score before you start applying for a loan.

How to improve your credit score.

If you want to improve your credit score, begin by understanding what makes up your score. The chart2 below breaks it down visually for you:

FICO Score chart

Notice that the largest weight is given to Payment History and Amount Owed. With this basic understanding of what goes into the score, you can begin to takes steps to improve it, including:

Pay your bills on time. Lenders need to know you are reliable with all your bills, not just credit cards, so make sure you are paying everything on time.

Keep balances low on your credit cards and other revolving credit. Lenders look at something called the credit utilization ratio (how much of your available credit you use). By keeping your credit card balances low, your credit utilization ratio will also be low, which improves your score.

Only apply for credit as needed. Unnecessary credit increases inquiries on your credit report (and can temp you to spend more than you can afford).

Check your report and dispute inaccuracies. Monitor your reports regularly to make sure they are correct and, if they aren’t, dispute them before they do harm to your score. You can read more about how to do this on our blog from our Credit Education Month series.

Next week we will continue our homeownership series with a look at the pros and cons of home ownership.


1  Wells, Libby. “How Your Credit Score Affects Your Mortgage Rate.” Bankrate, Bankrate.com, 12 May 2020, www.bankrate.com/mortgages/how-your-credit-score-affects-your-mortgage-rate/.

2 “What's in My FICO® Scores?” MyFICO, www.myfico.com/credit-education/whats-in-your-credit-score.