Ever wonder what impact your credit score has on the interest rate you pay on a new home mortgage?

Would you believe that a home buyer with a sub-par credit--for instance, a “FICO” score of 625--would pay an average 8.725 percent for a new 30-year fixed rate mortgage, while a buyer with a score just 100 points higher would be charged only 6.78 percent?

With the launch of a new, free online service, you can now learn what thousands of lenders across the country charge current mortgage applicants, based on their credit scores. The service is at www.myfico.com. “FICO” scores, developed by Fair, Isaac & Co., are used by most mortgage lenders to evaluate the credit risk of loan applicants. Scores generally range from the 400s at the low end to 850 at the highest. Low scores represent a greater risk of default to the lender; high scores signify low risk.

Here’s how the new service works. Say you live in California, and you already know your FICO. Say your score is well below average--in the mid-500s. That means you’ve probably been seriously late in your payments on several debts, and you may be maxed-out on your credit cards. With a FICO score in that range, you’re currently likely to be quoted 10.231 pecent on average for a new 30-year home mortgage, based on data from lenders throughout the state. By contrast, had you paid your bills on time and produced a credit score of 720 or higher, you’d qualify for an average 6.893 percent rate quote from the same California lenders.

The new service, designed to demonstrate how your credit history affects the actual price you’ll pay for a home loan, is based on current rate quotes obtained from several thousand lenders surveyed nationwide, according to Fair, Isaac. You can pull rate quotes, segmented by FICO scores, in every zip code in the U.S. Or you can check rates state-by- state. There is no obligation to buy an actual FICO score, although the Website sells scores online for $12.95 per order.

Part of the service also allows you to calculate the monthly payment savings you can achieve by improving your current score. For instance, raising your score from 650 to 700 can save you $37.27 in interest charges on a $100,000 mortgage. Over the 30-year life of the loan, the savings would total $13,418.39.

Quoting higher rates for lower scores is a widespread technique in the mortgage, credit card and auto loan fields. Known in the financial industry as “risk-based pricing,” it is used on every mortgage application submitted electronically to giant home loan investors Fannie Mae and Freddie Mac. The two investors dominate the market, and buy over half of all new conventional home loans.

How do you raise your FICO score to get a better rate quote? That’s a complex question, but the “myfico” Website has plenty of basic tips, ranging from recommended debt-limit ratios to the relative weightings used in the Fair, Isaac risk-prediction models. What it doesn’t emphasize, however, is a problem that affects the FICO scores of large numbers of American consumers: Their scores may be lower than they should be because of errors in the credit files maintained by the three big credit bureaus--Equifax, Experian and TransUnion. Fair, Isaac’s software cannot detect erroneous information in your credit file. You’ve got to do that on your own. The best way to start is by treating your credit record as if it were a personal health matter---meriting at least an annual checkup.

That means ordering a copy of your full credit file from one or all of the bureaus to check the accuracy of the information they contain on you. If a creditor mistakenly reports you as delinquent on a loan, that can send your credit score plummeting by 100 or more points in some cases. And that, in turn, could raise the cost of your next mortgage interest rate by thousands of dollars over the term of the loan.

Published: March 25, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.