A credit score
is the biggest factor in determining an interest rate, and it's the first
thing banks look at. "Any individual should be very conscious of what their
credit score is, especially if their credit score is middle to below average,"
says Karen Casey, an executive vice president at Greater Community Bank, in
Montclair, N.J., a CPA and Certified Financial Planner. Some banks use automated
underwriting and will reject applicants based on score alone. Other banks
might look at why your score has taken a hit. Mortgage lateness or default
is a red flag. Most banks will either reject these applicants outright or
put them in another category.
Beyond credit score, stability in employment is important.
Three years at your current job is best; some banks won't give loans if
you've held your job less than a year. Then income and income relative to
other expenses factors in. "The rule of thumb is a 40 to 45 percent ratio
is considered average. If the total of all debt and rent comes to less than
40 percent, there's a good chance you'll be approved." Food and utilities
are excluded from this calculation.
The first thing you should ask a bank is what the criteria
is for giving an unsecured loan, if that's what you're shopping for. Secured
debt, such as a mortgage or home equity loan, has a better chance of approval.
"Be upfront with the bank if you have an issue, bankruptcy, whatever," says
Casey. While bankruptcy won't drop from your record for 10 years, sometimes
it won't hurt as much after a few years as current nonpayment of debt. "That
is the absolute killer," she says. "If you can't pay your loans on time
that will really drive your credit down."
Don't apply for loans at several banks, because every
time that score is run, it will show up as a negative. If it's a mortgage
or auto loan you're after, the FICO scoring system allows you a little more
wiggle room. All applications for those loan types that fall within a 45-day
period only count as one inquiry. Check out interest rates online at Bankrate.com's
rate tables.
"If you see banks that have a lower rate than
others, get an understanding of what their process is, then apply if it
sounds right for you," Casey says. Talk to someone in their consumer
loan or personal loan department.
On the average 30-year mortgage, there's a 3
percent spread, and that's a bigger-ticket item. It can cost you a lot of
money to have a poor credit score.
Auto loans.
The difference in auto loan rates can be 4 percent to 6 percent, based on
your credit score. Some banks will have an even bigger spread. Multiply
that by the $20,000 average cost of a car to see how much a better score
would save you. Check auto
loan rates in your area.
