Lenders use your credit score to determine your level of risk. The lower your credit score, the higher your rate of interest. With a low credit score, you will not be able to get a good interest rate.
Significance
When you apply for a loan, whether it's a mortgage, auto loan or credit card, the lender will take a look at your credit report. That information will help determine the interest rate you receive. Your credit score will be a key factor used when deciding the rate you receive.
Effects
If you receive a high interest rate because of your credit score, you may be able to get a lower interest by refinancing later when your credit score has improved.
Warning
To improve your credit score, you need to make all of your payments on time and make sure you don't accumulate too much credit card debt. If you use more than 30 percent of all your available credit, your credit score will start to decline.
Credit Score Range
Your credit score can range from 300 to 850. If you have a score below 620, most lenders will not approve you for a mortgage loan.
Considerations
According to MYFICO.com someone with a FICO score (credit score) in the range of 740-850 will receive an interest rate of 7.770% and a monthly payment of $471 based on a home equity loan for $50,000. A FICO score of 620 to 639 will have a monthly payment of $603 and an interest rate of 12.095% for the same loan. These figures are based on national averages. FICO scores are credit scores, and they were developed by the Fair Isaac Corporation.
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