There are certain big purchases in life that will most likely require some sort of financing if you're not able to pay cash to cover the full cost. In these cases, creditors will look at a few things about your financial history first, including your credit score. Knowing what your credit score is essentially gives your creditors an idea of how much of a risk it will be to lend money to you.
The following are 4 types of purchases that will require your credit score report to be looked at before financing can be secured.
1. Buying a Home
Many home-buyer hopefuls are looking to enter the housing market right now in order to take advantage of current low mortgage rates, some of which are even lower than 3%. But before you can buy a house, you'll have to make sure that your credit score is in good shape, particularly if you want to qualify for a low interest rate, or just to get approved for a mortgage at all.
You'll typically need a credit score of at least 660 in order to qualify for a mortgage. While not long ago you may have been able to get a loan with as little as 580, banks and lenders these days are more cautious because of the mortgage crisis that plagued the US a few years ago.
The lower your credit score, the higher the rate of interest. To illustrate, on a 30-year, $200,000, fixed-rate mortgage, a 3% interest rate would amount to $841.21 a month, with a total of $102,832.85 being paid towards interest over the 30 year amortization period. In contrast, a 7% interest rate with the same figures will amount to $1,317.21 per month, with a total of $274,191.54 being paid towards interest by the end of 30 years. That's a big difference.
It's therefore in your best interests to do everything you can to improve your credit score so that your options for a mortgage are not limited, and more money is saved on interest charges.
2. Buying a Car
Your credit score report is commonly used in the purchase of a new vehicle. In the majority of cases, before you can finance the purchase of a new car, the dealership will probably check your credit score first. In much the same way that your credit score helps lenders predict your ability to sustain regular mortgage payments when applying for a mortgage, so will car dealerships use your credit score to assess whether or not you're too risky to be approved for a financing plan.
For the most part, in order to be successfully approved for a car loan with low interest rates, you'll probably have to have a credit score somewhere in the 740 range. Having a score in the upper 600s should be fine, but it will probably mean you'll be paying a higher interest rate.
3. Buying Land
If you plan on purchasing land, you'll most likely need a loan. While not usually more pricey than land with a home already built, land can still be pretty expensive, and securing a loan for one can be challenging with bad credit. Banks and major lenders might be more hesitant to approve you for a loan for an undeveloped land purchase than they might for a typical mortgage. If you have a low credit score, you might have a problem getting a loan, and even if you do, the fees and interest rates make it financially impossible.
4. Buying a Boat
Buying a new boat will also require a loan if you haven't got the cash to cover the entire cost of the purchase. After all, a boat can be as big of a purchase as a vehicle - if not bigger. The two most common options for obtaining a boat loan are a traditional collateral loan and a home equity boat loan. However, another option may be available, only if you have excellent credit - an unsecured personal loan. Either option you choose will depend on the health of your credit score in order to be approved.
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Lisa Simonelli Rennie is a freelance web content creator who enjoys writing on all sorts of topics, including personal finance, investing in stocks, mortgages, real estate investments, and anything else to do with the world of economics.