Credit Score Vs. Interest Rate

Oh no! Look at my balance!

Your credit score has a direct relationship on the interest rate you are charged for a new or current loan. The higher your score, the lower your interest rate should be on a new or current debt.

Function

A credit score tells a lender what the odds are you will repay your debt on time and in full. An interest rate is the percentage of the loan, or monthly fee, charged to the borrower for having the debt.

Types

There are three credit bureaus that report credit score: Experian, TransUnion and Equifax. Interest rates can be simple or compounding rates, depending upon the terms of agreement for the loan.

Time Frame

A credit score is updated once a month, and can fluctuate from month to month. Unless an interest rate is fixed, it can fluctuate as well based upon predetermined factors, including the borrower's credit score.

Effects

The lower the credit score of the borrower, usually, the higher the interest rate charged and vice versa. If the borrower has a lower credit score (under 620), the loan servicer has a higher risk in the deal and, therefore, charges a higher interest rate to offset that risk.

Considerations

Before procuring new debt, a borrower should check his credit score to see if any changes can be made to raise the score and increase his chances of a lower interest rate on the new debt.

References

• Privacy Rights.org
• Experian.com
• FinAid.org