When it comes to borrowing money, interest rates play a significant role in determining the cost of borrowing. But did you know that interest rates can also affect your credit score?
In this article, we will explore the relationship between interest rates and credit scores and how they can impact your ability to borrow money.
How Interest Rates Affect Your Credit Score
As mentioned, interest rates and credit scores are closely linked. And while the interest rates don’t directly affect your credit score, the inverse isn’t true. Your credit score is one of the main factors that determine and directly affect the interest rate you will receive on a loan or credit card.
Lenders use credit scores to assess the risk of lending money to a borrower. A higher credit score indicates that you are a borrower that is less of a risk, and as a result, will be offered a lower interest rate. Conversely, a lower credit score means you’re at greater risk of default, which leads to a higher interest rate.
Here is how your credit score affects interest rates:
- A good credit score (generally considered to be above 670) will qualify you for lower interest rates on loans and credit cards.
- A fair credit score (generally considered to be between 580 and 670) may still qualify you for loans and credit cards, but the interest rates will be higher.
- A poor credit score (generally considered to be below 580) may make it difficult to qualify for loans and credit cards, and if you do, the interest rates will be very high.
It’s important to note, however, that while credit scores play a big role in determining the interest rate you’ll receive on loans and credit cards, it isn’t the only one. Other factors such as income, debt-to-income ratio, and the type of loan or credit card also play a role and, in some situations, may even compensate for a poor credit score.
How To Get Lower Interest Rates
There are several ways to get lower interest rates on your loans and credit cards:
- Improve your credit score. Your credit score is one of the primary factors and one of the most important that determine the interest rate. By improving your credit score, you can qualify for lower interest rates. To improve your credit score, pay your bills on time, keep your credit card balances low, and avoid applying for new credit too frequently.
- Shop around. Don’t just accept the first interest rate offered to you. Shop around and compare rates from different lenders. Online lenders, credit unions, and local banks may offer better rates than large national banks.
- Negotiate. If you have a good credit history and a strong credit score, you may be able to negotiate a lower interest rate with your current lender. Contact your lender and explain that you have received a better offer from another lender, and ask if they can match or beat it.
- Pay off high-interest debt. Pay off high-interest credit card debt as soon as possible. This will help lower the interest rate on your credit cards, as well as improve your credit score.
- Use balance transfer. Consider a balance transfer credit card that offers a low or 0% introductory interest rate on balance transfers. This can help you pay off high-interest credit card debt quickly and at a lower interest rate.
- Consider a personal loan. If you have a good credit score, a personal loan may be a good option to consolidate your high-interest credit card debt into one loan with a lower interest rate.
The Bottom Line
Although interest rates don’t have a direct influence on your credit score, they can still have a significant impact, especially if they make it more difficult for you to make timely payments and lower your credit utilization ratio.
Fortunately, there are a variety of ways to get a lower interest rate. One of these is by improving your credit score, which can be done with credit restoration, which is the process of removing negative information from your credit report.
Call us at 888-799-7267 to schedule a Free Credit Consultation.
