By Michelle Fox -
CNBC + Acorns
In a matter of months, mortgage interest rates have gone from just over 3% for a 30-year fixed loan to more than 5%.
As potential homebuyers follow these numbers, there's something they may be missing: your credit score.
This three-digit number has a big impact on the interest rate you'll earn on a mortgage.
The higher the score, the lower the rate.
Numbers for credit performance range from 300 to 850. A good score is 670 to 739, very good is 740 to 799, and 800 and above is considered excellent, according to FICO, one of the major credit scoring companies. of credit.
Experts recommend taking care of credit to achieve lower interest when buying a home.Getty Images
The mortgage interest rate for a 30-year fixed loan is now 5.15%, according to Mortgage News Daily.
To get that interest rate, your credit score generally needs to be above 740, according to Glenn Brunker, president of Ally Home, which offers such services and products.
Below 740, lenders start adding more costs to reflect the additional risk of the loan
, the expert added.
This is added to the interest rate or paid separately in what are known as points.
Each equals 1% of the mortgage loan.
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"It doesn't seem that significant, but if you think about adding $20, $40, $60 more a month to your monthly payment as a result of a lower credit score, it can materially change your monthly budget and what you can afford," he said. Brunker.
With mortgage interest rates expected to continue to rise, consider lowering your credit score to take advantage of the best rates available.
This is what you can do.
Check your credit report
Your credit report is essentially a history of your credit activity and includes payment histories, credit card balances, and other debt.
A number of factors included in that report help determine your score.
If you do your report before you apply for a mortgage or pre-approval, ideally a few months in advance, you'll have time to correct any problems you find.
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Traditionally, you are allowed one free credit report a year from the three major credit scoring companies: Experian, Equifax, and TransUnion.
You can go to each of them directly or access them through annualcreditreport.com.
Note that on July 1, Equifax, Experian, and TransUnion should clear any medical debt that has been sent to collectors and ultimately paid.
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"That could instantly improve your credit score," said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
"Someone with a good credit score could lose 100 points or more if they have medical debt."
Pay your bills on time
Late or missed payments can lower your score.
The easiest way to avoid this is to set up automatic payments for your bills.
"Consistently paying bills on time will improve your credit score," says Tom Parrish, head of retail lending product management at Chicago-based BMO Harris Bank.
Reduce credit utilization ratio
Lenders will look to see if you have high credit card balances.
Even if you pay your credit card bills in full each month, you may still have a high utilization rate, Rossman said.
For example,
if you make $3,000 in purchases and have a limit of $5,000, you are using 60% of your available credit.
Try to keep it below 30%, the expert added.
Those with the best credit scores keep it below 10%.
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Making an extra payment in the middle of the billing cycle can help reduce your balance before your statement goes out.
Consider a Credit Building Loan
Some community banks and credit unions offer credit building loans, which are designed to help the holder establish good credit while making payments.
You'll pay interest, although some lenders may reimburse the charges once the loan is repaid.
Beware of additional credit inquiries
If you're thinking of buying a home, don't buy anything else of great value, like a car.
Also, don't open new credit cards or new lines of credit, which will cause more inquiries on your credit history.
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"If you have a high level of inquiries, your credit score goes down," Brunker said. "It gives the impression that you're actively looking for additional credit, and therefore more at risk."
analyze the decision
If you decide to improve your credit score before applying for a mortgage, keep in mind that there is a possibility that interest rates will be higher when you try to obtain a loan.
On the other hand, home prices may fall.
"We don't know what's going to happen to long-term rates and house prices," Parrish said.
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Brunker suggests that those with a credit score between 700 and 740 go ahead with a home purchase, while working to clean up their credit score.
For those with lower scores, first ask yourself if owning a home is the right move and if you understand the true cost of home ownership, he said.
“If the answer is still yes, I would consider taking a break for a few months,” Brunker said.
This article is part of the
Invest in You: Ready series.
Set.
Grow
(Invest in you: Ready. Ready. Grow), an initiative of CNBC and Acorns, the micro-investing app.
NBC Universal and Comcast Ventures are investors in
Acorns
.
