How Your Credit Score Affects Your Interest Rate
May 18th, 2009, Written By: Kerri Randall
If you’re looking for a loan for a car, mortgage, or other large purchase and you want the best interest rate possible, the best way to ensure you’ll get it is by having a high credit score. Think of it in opposites. The higher your score, the lower your interest rate will be. The lower your score, the higher your interest rate, and the more it will end up costing you in the end.
Your creditor views you as an investment. They are taking a chance when lending you money, and they need to make sure they will get that money back. The best way for them to ensure this is to apply an interest rate to your loan. In other words, you’ve got to pay them in order for them to pay you. The amount that you’ll have to pay is determined by your credit score.
If your score is high, it means that you are dependable and very likely to stay current on your payments. You are a low risk, so creditors will give you the better interest rates because they know their investment will be returned. However, the lower your score gets, the worse your history probably is, and the less a creditor will trust you. If they take a chance and approve you for a loan, they protect their investment by charging you a higher interest rate. The idea is that the higher rate will prevent you from defaulting and forcing them to spend time and more money in attempts to collect from you.
Take a look at your credit report at least a few months in advance of applying for a loan, and the earlier, the better. This will give you time to take steps to improve your score if you find negative history on your report, as well as time to dispute any errors. If you have given yourself enough time to rebuild a positive history, you will be more likely to receive a lower interest rate.
Categories: Credit Score Information
