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Debunking credit-score myths
Knowing more about your credit rating could help you get that mortgage loan and even save you money.
July 14, 2005: 5:58 PM EDT
David Ellis, CNN/Money staff writer

NEW YORK (CNN/Money) - To most Americans, your credit rating may seem like a string of numbers that hinges on your ability to pay your bills on time.

But it's also a crucial tool for saving money -- something most people don't know, according to a recent survey.

According to a recent survey conducted by GMAC Mortgage, 62 percent of consumers do not realize that a score of 620 or better means you can become eligible for getting the best possible mortgage rate.

"It really shows how little the consumer understands about what goes into a credit score and how it affects their home financing," said Paul Fein, the senior vice president and southeast divisional manager for GMAC Mortgage.

The survey, which polled 1,000 households during the month of May, also showed that many misconceptions about credit ratings persist among consumers. More than 50 percent of consumers answered that a rise in income means a better credit score when in fact credit scores do not take into account your income -- just your ability to pay.

Your credit rating, which can range from the worst possible score of a 300 to a perfect 850, is determined by a number of factors.

While the timeliness of your payments counts, the number of credit lines you might have and the length an account has been open all have a hand in determining that three-digit number.

The two factors that have the biggest impact on your score, said Fein, is the consistency and amount allocated towards paying off your debts over time and the amount of credit outstanding relative to total available credit.

Having a low score could cost you money when it comes to figuring out your mortgage payments.

Let's assume you have two identical home mortgage applicants -- one with a score of 640 and the other with a credit rating right at the magic number of 620.

According to, a credit information company, that 20 point difference turned into a little over half of a percentage point on the mortgage rate. The better credit risk could have gotten a $150,000 30-year fixed rate mortgage for 6.38 percent. The other guy would have to pay 6.92 percent, or $54 more per month and $648 more per year.

And that disparity can only increase as your credit score worsens or improves (see table above).

How to save yourself some money

So what if you are below that 620 mark?

The first thing to do, said Fein, is to reevaluate your notion of how to improve credit.

That means trying to reduce the amount of total debt you might be carrying from credit cards to car loans.

Bumping up that credit rating, he said, also means limiting the number of inquiries into your credit history, which might involve not applying for that new credit card for a while.

While lenders will consider your income and how much you have invested for down payment when approving your mortgage, your credit score will be scrutinized.

And probably the best way potential home owners can improve that rating, said Fein, is to plan ahead.

That means getting a sense of what your credit rating is far enough in advance before diving into the housing market.

He recommends checking out your credit history at least a year in advance even if you are thinking about buying a home so you have time to correct any misunderstandings, show you can make payments and trim your debt.

In the meantime,it may be worthwhile to speak with a lender or a credit counselor about your credit score and figure out a strategy to secure that home.

"If you're a consumer, you need to get with someone who works with it everyday," he said.

While consumers may be more knowledgeable about their credit rating than in years past, Fein warns that the results of the survey indicate more consumers need to be better informed.

"A large of group of people pride themselves on being more informed than a generation before and I think it leaves the door open to a lot of misinformation."

To help consumers understand their scores, CFA and Fair Isaac have prepared a free brochure now available online.

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