You’ve probably heard that good credit entitles you to affordable financing, but could boosting your score by, say, 10 points significantly affect the amount of interest you pay?
The answer: Absolutely, depending on your starting point. While rates, terms and conditions vary among lenders, there are certain tiers you should aim for in order to secure the very best rates on a mortgage, auto or credit card loan.
When it comes to shopping for a mortgage, your credit score holds major influence over the loan fees you must pay. Loan-level price adjustments, or LLPAs, are fees charged by Fannie Mae and Freddie Mac, the two government-controlled entities that purchase mortgages from lenders.
On rare occasions — when you offer an exceptionally large down payment — a price adjustment could save you money, but “most adjustments are costs,” says Michael Becker, a branch manager with Sierra Pacific Mortgage in White Marsh, Maryland. Prospective borrowers can pay them upfront as “points.” ( Each point costs 1 percent of the mortgage amount.) Alternately, they can choose a higher interest rate to offset the fees.
Base pricing will vary slightly by lender depending “on their margins and their volume and how hungry they are for business,” says David Kuiper, vice president of mortgage lending at Northpointe Bank in Holland, Minnesota.
The chart breaks down the loan-level price adjustments by credit score and loan-to-value ratio in use by Fannie Mae. Negative numbers are credits; positive numbers are costs:
Loan-level price adjustments by credit score
|Credit score range||LTV less than 60%||LTV 60.01% – 70%||LTV 70.01% – 75%||LTV 75.01% – 80%||LTV 80.01% – 85%||LTV 85.01% – 90%||LTV 90.01% – 95%||LTV 95.01% – 97%|
|Greater than 740||-0.25||0||0||0.25||0.25||0.25||0.25||0.25|
|Less than 620||0.50||1.50||3||3||3.25||3.25||3.25||3.25|
Source: Fannie Mae
Generally speaking, “the lower your credit score, the greater the cost (of the mortgage),” Becker says. The LLPAs increase or decrease at 20-point credit score intervals and “anyone within each interval or level will get the same rate,” Becker says.
A score of 740 generally qualifies you for the best adjustments — so there’s no pressing need to move the needle much higher before you hit the mortgage market. Conversely, you probably won’t qualify for a mortgage with a credit score less than 620, given Fannie Mae and Freddie Mac aren’t likely to purchase those loans.
To help you understand the value of your credit score, popular scoring model FICO provides on its website estimates of how these adjustments by credit score translate into rate differences.
Based on Bankrate’s national interest rate survey, a consumer with a FICO score between 680 and 699 trying to borrow $300,000 in early April would have qualified for a 3.709 percent rate on a 30-year fixed mortgage, resulting in a $1,382 monthly payment. In comparison, a consumer with a FICO score between 620 and 639 would have qualified for a 4.899 percent rate, resulting in a $1,592 monthly payment.
Many mortgage brokers will often try to help you improve your score so you can move up a tier and qualify for a lower adjustment.
For instance, they may look at the utilization rate you have on certain credit cards and say “pay this down to $1,850,” Kuiper says. After you do so, the broker will have your credit score pulled again.
This process is known as rapid rescoring, and generally, it will cost roughly $50 for every account on your credit report that needs to be addressed.
Keep in mind: LLPAs are triggered by more than just your credit score. Other factors affecting the overall cost of your loan include your down payment, the type of property you are trying to buy, the intent of the loan (whether you’re purchasing a house or refinancing) and the term (or length) of your loan.
If you want to eliminate the fees altogether, choose a shorter loan. LLPAs don’t apply to loan terms of 15 years or less.
To keep down loan costs, it pays to comparison shop. You should also burnish your credit before you hit the mortgage market. To improve your credit score, check your credit report for errors, address any delinquent accounts, pay existing debts and avoid applying for other loans.
Given the absence of a plastic-centric Fannie or Freddie, credit card underwriting is a lot less set in stone.
“Each lender has a slightly different policy,” says Eric Lindeen, director of marketing at Zoot Enterprises, which provides credit solutions to large financial institutions. “There are going to be differences in the rates that banks offer.”
Some issuers outline a broad range of annual percentage rates, or APRs, in their terms and conditions. A prospective consumer can qualify for any rate in that spectrum. Others will specify rate tiers.
“It’s a lot easier to have those established (tiers),” says Brian Riley, senior research director at advisory firm CEB TowerGroup. The set rates expedite the underwriting process since issuers can just go through applications and “chuck them into piles quickly,” he says.
To give you an idea of the value of a good score in the credit card marketplace, Lindeen provided the following estimates for a popular tiered APR rewards credit card offering.
If you carry a balance, qualifying for the lower rate could save you hundreds of dollars in interest payments. Let’s say, for example, you have a $1,000 balance and make the minimum payment each month. With a card that charges 12.99 percent APR, you’d pay $297 in interest and pay off your debt in just over five years. In comparison, if your credit score qualified you for a card that carries a 22.99 percent APR, your interest payments shoot up to $715, and it would take you nearly seven years to pay off the balance.
When your score gets below the 600 mark, you may still qualify for a credit card, but it’s likely to be a secured product.
Secured credit cards require cardholders to put down a cash deposit to serve as collateral if the bill isn’t paid on time. Typically, the deposit amount is also the cardholder’s credit limit — meaning it’s fairly low, between $250 and $500 — while the APRs on these cards hover around 22.99 percent.
Comparatively, the average APR on fixed-rate credit cards, according to Bankrate’s national interest rate survey taken in early April, was 13.02 percent, while the average APR on variable-rate credit cards was 15.78 percent.
Keep in mind, you aren’t beholden to less-than-stellar credit card terms and conditions forever. The payment method, if used correctly, is a great way to rebuild a bad score. If you make your monthly payments and refrain from running up a big balance, you should be eligible for a better APR in a relatively short amount of time.
Issuers typically conduct “at least one account review per year,” Riley says, timed around the winter holidays, so “if you come in on January and you sustain that relationship for the year, it’s very likely that they’ll at least improve the credit line (and) probably improve the rate.”
You’ll be able to see this bump, should it be awarded, online or on your monthly statements. If you don’t, call to inquire about increasing the credit limit.
Also, feel free to shop around, but make sure to comparison shop before you apply for a new card. Each credit card application generates a hard inquiry on your credit report, which could ding your score. Bankrate’s credit card quiz can help you narrow down what type of card may be right for you.
Auto lending underwriting will similarly vary by lender — and each will consider more than just your credit score.
“We evaluate a set of factors to determine creditworthiness, and weight their importance using a proprietary decision-making process,” says Natalie Brown, a spokeswoman for Wells Fargo, one of the nation’s largest auto lenders. “These decisions are more complex than just a credit score alone, as we do not believe FICO is the only metric to consider.”
Other factors influencing your rate include the size of your down payment, your income, other collateral or the term of the loan. You can also expect to pay a higher interest rate for a used car than you would a new one.
“A new car will have lower cost of ownership and, of course, there are maintenance programs and warranties,” says Melinda Zabritski, senior product director of automotive finance for the credit bureau Experian. “On used vehicles, there will be more out-of-pocket expenses for maintenance and then additional warranties or out-of-warranty work.”
This proclivity means there is slightly higher risk associated with a used vehicle purchase — “hence slightly higher rates,” Zabritski says.
Experian monitors the state of the automotive finance market regularly. The following average rates from the fourth quarter of 2014 can give you an idea of how your credit score may affect what you pay for auto financing:
Those with the highest credit scores will pay less in interest and have lower monthly payments. Qualify for a 2.69 percent interest rate on a $15,000, four-year loan and you’d pay $330 a month with total interest payments of $838. Compare that with a subprime rate of 10.49 percent, under which you’d pay $50 more per month and about $2,600 more in total interest payments.
According to Bankrate’s national interest rate survey taken in early April, the average interest rate on a 60-month new car loan was 4.28 percent, while the average interest rate on a 36-month used car loan was 5.11 percent.
Consumers with super-stellar credit may qualify for zero percent financing. These deals, however, are “typically going to be offered only on new cars,” Zabritski says, and “each lender is going to have a different consideration of what they would classify as the score that would qualify.”
It’s important to note that, unlike mortgage brokers, auto lenders aren’t likely to help you qualify for a better deal. Auto lending is often indirect, meaning the seller works with a number of lenders to find you a loan after you agree to purchase a car.
“The lenders really are working with the dealer,” Zabritski says. “The dealer … is who is viewed as the customer.”
As such, it’s a good idea to clean up your credit report and (hopefully) raise your credit score before you go shopping for a vehicle. You should also do some research before you hit up the car lots.
“Go ahead and get preapproved (for an auto loan) so you already have an idea what you would qualify for within your bank,” Zabritski says. “It gives the dealer something to beat.”