Dear Dr. Don,
A divorce decree required my former husband to refinance the mortgage on our home and take my name off the note. But in the process, he failed to keep current on the mortgage, apparently believing it would be refinanced before a 30-day grace period was up. After his foul, my credit score, which previously stood around 815, now includes the damaging 30-day late payment. The divorce decree says I am not responsible for the house payments, but the mortgage company reported me anyway.
How much more interest will I have to pay on a mortgage because of the damage to my credit score?
The lender wasn't party to your divorce decree. Since your name remained on the note, you also remained responsible for the payment. Let's face it, ex-husbands make mistakes. That's what led many of them to be divorced in the first place. Not an excuse, just fact.
Interest rates are determined partly by the risk perceived by the lender that you won't repay your loan. Yes, a lower credit score will result in a higher interest rate.
Ironically, consumers with higher credit scores take a bigger hit to their credit score when they make a "credit mistake." For someone with a 780 credit score, FICO estimates that a 30-day late payment will reduce their credit score by about 100 points.
What will that drop in your credit score cost you through a higher rate of interest? The myFICO.com website shows differences in annual percentage rates for different credit scores. From what I see on a 30-year fixed-rate mortgage, your rate would be about 0.25% higher after the hit to your credit score. Interestingly, the difference on a five-year auto loan could be closer to an increase of 1.5%.
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