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The Effects
Credit Score On Your Interest Rate
Your credit score is a vital tool of assessment that lenders use to estimate your ability to make regular and consistent payments. Extending a line of credit to an individual can be a risky undertaking with no guarantee of return. For this reason, lenders need a quantifiable method of estimating your ability to repay the loan in a timely fashion and your credit score does just that.
The relation between your credit score and your interest rate is the higher your credit scoring, the lower your interest rate. This translates into lower monthly payments and often times a significant savings over the life of the loan. There are different types of credit scores but the one used most widely to assess credit risk is called the FICO score. FICO stands for Fair Isaac Company. The highest FICO score is an 850 and the lowest is 300. The majority of the population falls between 500 and 799. Lenders will analyze the content found in your credit report in conjunction with your score to determine how much credit to extend to you and what interest rate to offer you.
When making a large purchase such as a home, often times the difference in a few points of credit can have a major effect on your interest rate. For example, with some lenders the difference between a credit score of 759 and 760 can equate to a .222% on a 30 year fixed mortgage loan. Over the life of the loan, this can add up to an extra two thousand dollars and more. If just one point can have such a significant impact, it is important to consider what having a lower score could cost you in the long run.
In addition to higher interest rates, your credit score can affect the amount of documentation you are required to provide to your lender, the rate of your private mortgage insurance, the size of the loan you may qualify for, as well as the size of your down payment. In some instances, having too low of a credit score can put you at severe risk of predatory lending. This is the practice of deceiving the borrower with hidden fees, overextended loans, and extremely high interest rates. These unscrupulous practices often causes the individual to end up with more debt than they started out with, resulting in an even lower credit score.
Taking steps to increase your credit score can have a positive effect on your finances. A higher credit score can result in significant savings and lower monthly payments. Be sure to review a copy of your personal credit score at least every six months. In order to increase your score, dispute items which are outdated and erroneous and make every effort to make your monthly payments in a timely manner. Although your score is not the only thing that lenders use to assess your credit risk, it Is a vital part of the process and every effort should be made to increase your score.
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Debt Consolidation - Loans & Credit Card Bill - Debt Consolidation
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Thursday, September 01, 2011
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