March is Credit Awareness Month and what a perfect time to evaluate your finances. Spring is a traditionally a season of renewal, and many people start looking to buy a home, refinance, or begin a home project or renovation. Whatever your next move is, your credit score can affect it in more ways than you might realize, and taking a few small steps today can help you prepare.
The Importance of Credit and Your Mortgage
For Future Buyers
Credit affects the rate you pay on your mortgage. The higher the score, the lower your rate could be. Your credit score also affects the Loan Level Price Adjustment fees (LLPAs) paid on your loan. These are upfront premiums that mitigate risk. The lower the credit score, the higher the risk, and the higher the LLPA. LLPAs can potentially add hundreds to thousands in the upfront cost of your loan.
Credit may also affect the loan program you qualify for. For example, conventional loans require a minimum 620 credit score. However, credit isn’t the only factor considered in qualification–other factors are taken into account, as well, such as the amount of your down payment and the type of home.
For Current Homeowners
Credit is important for current homeowners as well because it can affect future refinance opportunities, qualifying for a HELOC, or your next home purchase. Just one missed mortgage payment could mean as much as a 100 point drop in your score. Not only would you pay a late fee for the missed mortgage payment, but the credit score drop could also mean a higher rate and cost on your next home loan, and the credit damage could last for years.
A Simple Spring Credit Check-Up
Review your credit report. You can get a free annual credit report here. Check for any signs of fraud, such as accounts you did not open. Make note of your balances and payment history and check for errors.
You’ll want to pay attention to your credit utilization as well. A general rule of thumb is to keep balances below 30% of limits, and lower is typically better.
Automate payments. If you have missed or late payments on your credit report, set up auto payments through your checking account or put a perpetual reminder on your calendar.
If planning a mortgage, avoid major credit changes. If home buying or refinancing is in your near future, avoid opening new accounts, making large credit purchases, and closing long-standing accounts.
If Your Credit Isn’t Where You Want It
You can improve your credit with small steps over time. Credit improvement takes time, and it’s important to remember that progress matters more than perfection. Lowering your credit usage and making on-time payments will make a difference in the long run.
Avoid closing old accounts. All your credit accounts, even the ones you’re not using, contribute to your overall available credit. If an account is closed, your available credit decreases, which could increase your utliziation ratio.
Spring Is About Fresh Starts
Just like spring cleaning your home, reviewing your credit can ensure you’re prepared for any spring projects you’re planning. A quick credit check today could create more financial flexibility tomorrow.
