Credit Score and Interest Rates

An Intro to Your Credit Score and Loan Interest Rates

How your credit score affects your interest rate could mean thousands of dollars to a home buyer over the life of a loan. Even if you’re just getting a credit card, over time the higher interest rate will take a huge chunk out of your wallet and make it difficult to save for larger-priced things like a car or house.

You Credit Score and a Potential Lender

For the lender, your credit score means the level of risk involved in lending money to you. Lenders have to look at more than your income to decide if you are worthy of them taking a chance on you. This is largely based on statistics of delinquency rates, which are charted like this:

For the 700 and up scorers, there isn’t a lot of difference in the delinquency rates and they enjoy the best loans and interest rates. As the scores drop after 700, however, you can see how the risk increases—for the population from 600 to 649, for example, a 31% delinquency rate with 11% of the population means that for every 10,000 people they loan money to in this category, statistically 341 will have delinquencies. If that sounds like a lot, let’s move to the lowest group. Out of 10,000 loans to that group, 870 will fall behind on payments!

Lending and Credit Score Variations

If you were a lender, who would you want to lend to? Of course, the 700 and up group. If, however, you are a sub-prime lender, you may be in the business of creating and selling loan products to people in the lower scores. If so, you will still want your wallet covered—you would charge a higher interest rate to make up for the defaults.

A Low Credit Score and Your Lending Options

For this reason, people with low credit scores are often victims of predatory lenders. It’s sometimes attractive to take a high interest rate for the chance to have a house, but you may be better off taking the time to clean up your credit first so you can let time be your friend. When you have all your creditors paid and errors fixed, get a secured credit card and make all you payments on time. You can’t erase the past, but you can clean up your future.