Does the Credit Score Affect Rate?

When you're considering taking out a loan or applying for a new credit card, keep in mind that whatever you purchase will cost you the amount of the item plus the interest rate on anything you don't immediately pay off. Depending on what you buy, the difference may be thousands of dollars. To get the lowest interest rates, you must get your credit score into tip-top shape.

Credit Score

Think of your credit score as a snapshot of your financial history. According to Edmunds, your payment history makes up 35 percent of your credit score, while your debt utilization ratio (also known as amount owed) makes up 30 percent. Another 15 percent goes to the length of your credit history, with 10 percent going to each your credit history and types of credit. Because your credit report reflects how responsible you've been with your finances, lenders use it to gauge how risky it will be to lend you money.

Interest Rates

The more of a risk you may be to a lender, the higher your interest rate will be. Therefore, it's vital to get your credit score into the best shape possible before applying for a loan or credit. According to Kiplinger writer Kimberly Lankford, a person with a credit score of 760 or higher may qualify for a 30-year fixed rate mortgage at 5.98 percent interest, while someone with a score between 620 and 639 will get stuck with a 7.47 percent interest rate on the same loan. While that's less than 2 percent, the difference on a $216,000 mortgage is $2,724 per year.

Credit Report

To find out where you stand financially, you may get a free copy of your credit report from each of the three major credit bureaus at the Annual Credit Report website. Once you have accessed your credit reports, you will have the option to purchase your credit score. If your score isn't within the high ranges, where you may get the best interest rates, it may make sense to wait on applying for a loan. Remember, each hard inquiry into your credit report creates a small negative effect on your score.

Considerations

To improve your credit score and obtain stellar interest rates, it's important to pay all your bills on time and to get your balances down. Your debt utilization ratio is the relationship between the amount of debt you have and your credit limits. The Better Business Bureau recommends keeping balances below 25 percent of your credit limit to keep your credit score healthy.