Why Your Credit Score Matters When Rates Are Rising, and How to Improve It

Blog posted On April 20, 2022

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Working to improve your credit score is always good idea, especially when preparing to buy a home. But when interest rates are rising, it may be even more important than you think.

In a rising rate environment, most people will focus on their interest rate and loan payments – especially if they have an adjustable-rate loan. Many people will overlook their credit score. Why does a credit score matter when interest rates are rising? Because your credit score can directly impact the rate you get on your loans and your monthly loan payments.

How your credit score impacts your rates

Lenders analyze a variety of factors when evaluating your loan application. One of the biggest considerations is your credit score. Your credit score gives your lender a good idea about how well you manage debts. If your credit score is low, they might assume you manage debts poorly. Therefore, loaning you money will be a greater risk. Consequently, they’ll charge you more in interest.

Generally, when you’re looking at sites that state the current average mortgage rate, those numbers are only targeted at people who have a certain credit score. According to the leading scoring company FICO, a ‘good’ credit score is considered to be in the range of 670 to 739, ‘very good’ is from 740 to 799, and 800+ is considered excellent. Most of the rates you’ll see online are generally for people with ‘very good’ scores.  So, if the hypothetical average 30-year mortgage rate is trending around 5.15% according to sites like Mortgage News Daily, then you would have to consider the additional credit score implications.

How to improve your credit score

  1. Pay your bills on time

The most influential factors for your FICO credit score are your credit history and on-time payments. The easiest way to assure you don’t miss payments is by setting up autopay.

  1. Keep tabs on your credit utilization rate

Your credit utilization rate shows how much of your available credit you actually use. The lower your credit utilization, the better. The higher the credit utilization ratio, the lower your credit score.

  1. Leave old debts on your report

You might feel like wiping the slate clean and starting over will help boost your score. However, it’s quite the opposite. Leaving debts on your report shows lenders and scoring companies that you can handle and completely pay off large debts.

  1. Don’t close old accounts

Closing your credit card accounts can actually lower your credit score. When you close an account, you will have a lower maximum credit limit. But you also don’t want to keep an account open with a carried balance. So, it’s best to keep your credit card with a balance of $0 open, even if you aren’t using it.

  1. Only apply for credit when you need it

Every time you apply for a new line of credit, your credit card company will pull a hard inquiry on your report – which will lower your credit score temporarily. However, the effects of a hard credit pull could last up to 12 months.

  1. Continue to monitor your credit

Viewing your own credit results in a soft inquiry – it doesn’t hurt your score. You should strive to check in on your score every few months to make sure that it is heading in the right direction. If it’s not, you may need to make some changes.

Lastly, consider a cash-out refinance. With a cash-out refinance, you can do almost everything that you can with a typical refinance (lower mortgage rates, cancel mortgage insurance, switch to a fixed-rate mortgage etc.). The main difference is, as the name suggests, that you can take cash out from your existing home equity. Then, you can use the money you take out from your equity to pay down any debts that have higher interest rates than mortgages (credit cards, auto loans, etc.). To explore different financial scenarios of a cash-out refinance, check out our refinance calculator.


Sources: CNBC, Mortgage News Daily