Does Lowering My Interest Rate Affect My Credit Score?

Credit cards have variable balances and payment requirements each month, depending on how much you spend and pay. Loans are for a fixed amount, with set monthly payments and a predetermined repayment time. Both of these account types impose interest charges, which can sometimes be lowered. The reduction can then have ripple effects on your credit score.

Direct Effects

Many financial factors affect your credit score, including all credit-related account balances and payments. Scorers like FICO plug data from your credit reports into their formulas to come up with your three-digit number. Your loan and credit card interest rates are not part of your records at the Equifax, TransUnion and Experian credit bureaus, so there is no direct effect on your score if you lower your rates. Your score affects your initial rates, as lenders give better terms to their most creditworthy customers.

Indirect Effects

Lower interest rates indirectly affect your credit score because they influence your owed amounts and repayment time. High interest costs you more over the life of your loan, making you more likely to run into financial trouble if you are on a tight budget. Credit card accounts with high rates take much longer to pay off if you cannot afford to send more than the minimum due for each statement. Some of each payment goes toward the interest, so a high rate means that less is applied to the actual balance. The Credit CARD Act makes card issuers print a payment schedule that shows how long it takes to repay an account if you stick to the minimum, according the Board of Governors of the Federal Reserve System. Lowering your rates reduces that time.

Loan Process

Refinancing lowers your installment loan interest rate if you find a bank, credit union or other lender that offers better rates and accepts your application. For example, you can refinance a vehicle loan or mortgage if interest rates go down or if you improve your credit score after getting the initial loan and now qualify for better terms. The refinancing applications hurt your score slightly, but it should not go down more than five points even if you apply with multiple lenders, according to the MyFICO scoring website. Fill out all the applications within 30 days so the scoring formula figures them in as a single inquiry. You score will recover if you consistently make all payments on the new loan and your other bills on time.

Credit Card Process

Credit card interest rate lowering is often a matter of asking for better terms, according to Bankrate writer Lucy Lazarony. Check competitors' terms, then call your bank and ask for a match if you found anything better. If you are a long-time cardholder who always pays on time, emphasize that fact. Your balance will drop more quickly if your rate is lowered, but you continue to pay the same monthly amount, and the lower debt load raises your score. Transfer your high interest balance to a lower interest card, if possible, if your bank refuses to give you a better rate.