Credit Scores and Interest Rates

How your Credit Rating Affects the Cost of Borrowing

Credit Scores and Interest Rates

Your credit score is a measurement of financial reliability; it predicts how likely you are to pay your debts. The impacts of the often-mysterious credit score reach far beyond the credit limit on the plastic card in your wallet. Your credit rating is also a large factor in approval and rates for lending companies and even utility companies, phone companies, or landlords. Credit scores predict the likelihood of on-time, in-full payments over the next 24 months, which is exactly what lenders need to know today.
There are several different models, algorithms, and credit rating bureaus, so you actually have more than just one credit score and they're probably not the same. The algorithms and exact value metrics used by each bureau are kept secret, so knowing how to fix your credit score can feel like an elusive quest. FICO is the biggest name in credit reporting and more than 90% of financial institutions in the US use the FICO score for lending decisions. We also use the FICO scoring ranges in the loan calculators on this website to help estimate loan interest rates.
Interpreting your credit score is fairly easy. FICO credit scores range from 300 to 850. The higher your credit score number, the better! High scores earn the easiest approval processes and the best interest rates. Credit scores essentially fall into five categories:
  • 800-850
    This nearly-perfect score range is considered exceptional. Only about 20% of consumers achieve an 800+ score, putting them well above the average consumer.
  • 740-799
    Competitive interest rates and higher limits are accessible to this credit score tier and above. Consumers have a very good chance of credit approval.
  • 680-739
    Credit scores that fall within this median range are generally considered acceptable for borrowers, but consumers will most likely receive average rates.
  • 580-669
    Falling below the median score categorizes consumers as "sub-prime" lending candidates. It may be difficult to get credit with some lenders or higher interest rates may be charged.
  • 300-579
    Consumers in this range are considered at high risk for delinquency. Credit applications are frequently rejected or may require a fee and deposit to open accounts and lines of credit with the highest interest rates.
There are many factors that affect your credit score, including payment history, amounts owed, length of credit history, types of credit, and new credit inquiries or account openings. FICO reports that up to 35% of your score is influenced by payment history, including your timeliness of payments.
It's important to note that borrowers with no credit history are given the benefit of the doubt by many lenders. You may be given smaller limits at average interest rates until you build up a credit history. Our loan payment calculator and loan affordability calculator assume average interest rates for those with no credit, similar to what a consumer with a 700 credit score might get.
Credit scores are not at all affected by personal or demographic information. Many consumers are surprised to learn that their income, marital status, and even child support payments have no effect on their credit score. Scoring a big pay raise won't make your credit score budge a bit!
Improving your credit score takes time because it's a 24-month prediction of your financial reliability. Weighty missteps like foreclosures, delinquencies, and bankruptcies can negatively affect your credit for years, even with immediate corrective action. Most of the suggestions and tactics are more preventative than reactive:
Credit DO'S
  • Pay on time and set up automatic payments
  • Pay off debt as quickly as possible
  • Keep your balances and debt-to-limit ratios low with small balances on more accounts
  • Open new accounts to build a credit history and profile, but only when needed
  • Correct inaccuracies on your credit report and protect against fraud
Credit DON'TS
  • Open too many accounts within a short period of time
  • Close your oldest credit account or remove proof of longevity
  • Max out your limit or consolidate debt to a single account
  • Pay late or below the minimum, which actually counts as a late payment
  • Let any bills, including utilities or medical fees, go to collections
Before you apply for an auto or personal loan or plan that next big purchase, be sure to check your credit score. Knowing your score will help you understand the rates offered by lenders and possibly save you from overpaying. Everyone has the right to a free credit report each year through the major credit reporting agencies and most banks or loan companies offer easy score access to customers. There are also a variety of free monitoring sites available that provide alerts and education tools with monthly service fees.
In addition to tracking progress and reversing poor financial habits before they pull your score down too far, it's important to check your score for accuracy and completeness. If you discover an error, you can file a dispute directly with the reporting bureau. As a measure of your reliability, it's important that it accurately reflects your financial history.

Try our Loan Calculators

Our loan calculators use credit ratings to estimate loan payments and interest rates. You can also calculate loan size base on payment affordability, payback periods or required payments.

Check your Credit Score

TransUnion
In the United States there are three major ratings agencies for consumers: Experian, Equifax and TransUnion. You can access their credit reporting services below: