How Credit Scores Impact Your Interest Rate (2024)

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How Credit Scores Impact Your Interest Rate (3)

There's no doubt that a strong credit score makes it easier to secure a mortgage with favorable terms when buying a house. The higher your credit score, the lower you can expect your interest rates to be, which can translate to significant savings over the life of your loan. A damaged credit score, on the other hand, can lead to higher interest rates and make it difficult to qualify for certain types of loans without repairing credit first. Understanding how credit scores impact your interest rate is an important step in securing a mortgage for your next home.

  • Risk-Based Pricing Highlights Importance of Credit Scores
    The mortgage industry is largely based on risk-based pricing, which means that the cost of your loan goes up based on your level of credit risk based on the lender's calculations. Credit scores range from 300 to 850, and to qualify for a conventional mortgage, you'll typically need a score of at least 620. Where your score lands between 620 and 850 has a big impact on your interest rate, so it's worth keeping your credit history as clean as possible.
  • What's a "Good" Credit Score and How Do You Learn Yours?
    While standards vary between lenders, most agree that a "good" credit score checks in at 670 or above. Unsure of your credit score? You can request a free copy of your credit report once per year, allowing you to see your three major credit scores. After the first annual report for each bureau, additional reports in the same year require a fee. HUD-approved housing counselors can also provide you with a free report and help you review it.
  • How Lenders Use Credit Scores to Calculate Interest Rates
    Higher credit scores lead to lower interest rates, and lower credit scores lead to higher interest rates. A higher score increases the lender's confidence that you'llmake payments on time, while a lower score presents increased risk to the lender. The difference between a 620 and 750 credit score could lead to a half-percent increase in rate, which may not sound like much but ultimately makes a big difference.
  • A Small Change in Rates Makes a Big Difference Over Time
    Even a change of half a percent in your mortgage rate can ultimately make a major impact over the life of your loan, and the potential exists for even larger gaps in interest rates based on credit score. That half-percent difference, over the life of a 30-year mortgage, could add more than $20,000 to the total cost of the loan.
  • How to Repair a Damaged Credit Score
    If your credit score could use some work, the ideal time to start isbefore shopping for a loan. Make all payments on time, resolve old debts, and review your credit report to look for inaccuracies. If there are inaccuracies in your report, resolve them with the relevant credit agency.
  • Protecting a Strong Credit Score Before Buying a House
    If your credit is already in great shape, don't do anything to lower it before shopping for a mortgage. That means it's best to put off big purchases and new lines of credit until after you're done buying a house.

While your credit score impacts many facets of the mortgage process, the biggest key is how it affects your interest rates. A higher credit score ultimately means lower interest rates, and that's a big win financially long-term when buying a house. Even if your credit has seen better days, there's plenty you can do to get your score in shape before pursuing a mortgage.

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How Credit Scores Impact Your Interest Rate (8)

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How Credit Scores Impact Your Interest Rate (2024)


How Credit Scores Impact Your Interest Rate? ›

A higher score increases a lender's confidence that you will make payments on time and may help you qualify for lower mortgage interest rates and fees.

How does credit rating impact interest rates for borrowers? ›

As such, credit scores directly influence what mortgage rate a lender offers you. Higher credit scores will usually mean a lower interest rate (and a lower monthly payment), while lower scores will usually receive higher rates.

Why is my APR high if I have good credit? ›

Key takeaways. Your credit card APR can go up if the prime rate changes, you paid your credit card bill late, your intro APR offer ended or your credit score dropped. If your APR increases, you can work on paying down your balance or transfer your balance to a card with a low or 0 percent intro APR offer.

What interest rate will I get with a 720 credit score? ›

Average personal loan interest rates by credit score
Credit scoreAverage loan interest rate
7 days ago

What credit score will get you the best interest rate? ›

It might be exciting to aim for 850, the highest possible FICO score, but it really comes with no additional benefits. According to credit expert John Ulzheimer, a 760 will get you the best mortgage rate and a 720 score is all you need for the best interest rate for an auto loan.

How does your credit score impact your interest rate? ›

If your credit score is in the highest category, 760-850, a lender might charge you 3.307 percent interest for the loan. This means a monthly payment of $877. If, however, your credit score is in a lower range, 620-639 for example, lenders might charge you 4.869 percent that would result in a $1,061 monthly payment.

Do people with bad credit get better interest rates? ›

Lenders use higher interest rates as a way to protect themselves from the risk when the people they lend to have a history of late payments. Having no credit—or a low credit score—means that you'll likely pay more in interest when you need to borrow.

Is 12% APR too high? ›

Yes, an APR of 12% is a good credit card interest rate. However, you should still pay off your balance in full each month to avoid paying interest. If you are carrying a balance, consider a debt consolidation loan or a balance transfer offer.

What is a good APR for excellent credit? ›

If your credit is good, you can find ongoing APRs under 10%, usually from credit unions. Even some secured cards for people with bad credit offer a low APR, though you'll usually have to pay an annual fee to access it.

Is 29.99 APR high for a credit card? ›

Penalty APRs are part of why credit card overspending can be so dangerous, as they may reach higher than 29.99% when a payment is at least 60 days late. Interest rates this high would be unthinkable in most other common lending contexts.

How does a high credit score impact a borrower's interest rate? ›

A high credit score indicates that the risk of default on a debt is relatively low. Because a borrower with a high score statistically presents less risk to the lender, the lender may choose to offer a lower interest rate to reflect that reduced risk.

What are factors that impact a borrower's interest rate? ›

Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores. Lenders use your credit scores to predict how reliable you'll be in paying your loan.

How are borrowers affected by interest rates? ›

A rise in interest rates often means that it will cost you more to borrow money. A rise in interest rates may affect you if: you have a mortgage, a line of credit or other loans with variable interest rates. you'll need to renew a fixed interest rate mortgage or loan.

What is the impact of credit scores when borrowing money? ›

A good credit score can increase your chances of approval and help you qualify for lower interest rates. Lenders also consider your income, employment, and current debts when evaluating your loan application. You can improve your score by paying on time, spending less and avoiding taking on more debt until necessary.


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