New credit reality: scores must be higher to get the best rates

thermometerGetting the best interest rates on major purchases, whether that's a house or a car, can be much harder with today's stricter credit standards. Credit scores must be higher, and so does the amount you plan to put down on a house, even to get a mortgage.

In 2006, when I wrote my book, The Complete Idiot's Guide to Improving Your Credit Score, you could get a 0% down home loan with a credit score of 720 and still get the best interest rate. Today in order to get the lowest rates for a home loan, you'll need at least 10% down and a credit score of 760 or higher. For a 15-year equity line, you'll need a score of at least 740 and you'll only be able to get a loan for up to 80% of your home's value. In 2006, you could get a loan for as much as 100% of the home's value. Loans for as much as 125% of the home's value were also available, but you wouldn't get the best interest rate.

Be prepared
Every time you open a new account, you can expect your credit score to drop at least 20 points, so if you're thinking of a major purchase in the next six months to a year, don't even think about opening a store credit card to take advantage of an immediate discount. That 10% or 20% discount on one small item could blow your chances of getting a better interest rate on a mortgage, equity line or car loan. That could end up costing you hundreds or even thousands of dollars if your credit score falls out of one of the higher categories.

So what kind of interest rates can you expect based on your credit score? I developed the credit score chart below to compare interest rates as of January 10, 2010, for a $200,000, 30-year fixed-rate mortgage, a $50,000 15-year equity loan and a $25,000 36-month car loan using FICO's score information.

Interest Rates and Payments by FICO Score
Interest Rates as of Jan. 20, 2010
Fico Score30-Yr Fixed Mortgage15-Yr. Equity Loan36-Month Auto LoanPayment on $200,000 home
760-8504.67%$ 1,033
700-7594.89%$ 1,060
680-6995.07%$ 1,082
660-6795.28%$ 1,108
640-6595.71%$ 1,162
620-6396.25%$ 1,232
Payment on $50,000 Loan
Payment on $25,000 Loan

Of course, it's possible that you'll be able to negotiate better rates with your bank, but this chart will give you an idea of what the national rates are. If you live in one of the states hit hardest with foreclosures, such as Arizona, California, Nevada or Florida, you might find that rates are even higher in your area, credit score requirements are tighter, and the amount you'll need to put down to get the best rates is higher still.

Taking a close look at the chart will show you what you can most likely expect to pay. For instance, if your credit is 689, you'd pay 0.40% more in interest for a mortgage than you would if your score was 760 or above. A score as low as 638 would mean that you'd pay 1.58% more. Those may sound like small percentages, but they mean big bucks when you think about the life of a 30-year home mortgage. Using's amortization calculator, for instance, I found that a person with a 699 credit score who took out a 30-year mortgage at the rate of 5.07% would pay about $17,400 more in interest over the life of the loan than would a person with a credit score of 760 or more. And if someone had a credit score of 639, he or she would pay $71,000 more over the life of the loan.

So if you're thinking of a major purchase, your first step is to check your credit score. You can do that for free at You may also want to check out the Credit Score Simulator to test how certain credit actions will impact your score.

If you find that your score is below 700, work on improving that score before you try to apply for any major loans. Here are some key things you can do to help improve your score quickly:

  • Pay your bills on time. That's the number one thing that drives a score lower. In fact, if you're an on-time payer and all of a sudden miss one or two payment deadlines, your score could drop as much as 125 points.
  • Pay down your credit cards to a utilization rate of no more than 30%. For example, if you have $10,000 of allowable credit, you should carry no more than $3,000 in credit card balances.
  • Don't apply for any new credit. Each time you apply for a new credit card or loan, your credit score goes down by as much as 20 points.
  • Get a free credit report from each of the three credit bureaus at, and correct any mistakes you find. You can get one free report every year from each of the three credit bureaus.
The process of correcting errors on your credit report and then waiting until your credit score improves can take at least six months. If you haven't paid bills on time or carry a high balance, it could take a year or more to really improve your credit score. But it's time well spent. So take the time to get your credit score over 700 before you go shopping for any big purchases, like a house or a car. You'll save a lot of interest and ultimately be able to afford what you want more easily.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and Surviving a Layoff: A Week-by-Week Guide to Getting Your Life Back Together.
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