How much does your credit score affect interest rates on loans?

Credit scores are undoubtedly one of the most important things lenders look at when lending out loans. Therefore, it is critical that you understand what aspects of your loans will be affected by your credit scores.

Does your credit score affect your loans’ interest rates?

In short, yes your credit score will have an impact on the interest rate you are charged. The reason why your credit score matters is because of what your credit score represents. While there is no definite and fixed credit scoring model, almost all of them examine a few key aspects:

• Credit usage - this represents how much of your credit you are actually using and accounts for 35% of your score.  
• Credit mix - this indicates the types of accounts in your credit report and accounts for 10% of your score
• Credit age - highlights how long each of your accounts has been open for and accounts for 15% of your score. 
• No. of credit inquires
• Payment history - accounts for 35% of your score  

Credit scores range from 300 (very poor) to 850 (Exceptional); therefore, a credit score lets a lender know what your financial circumstances are. 

In most cases, a high credit score is rewarded with a low interest rate as there is consistent evidence to indicate to the lender that you make timely payments on a regular basis. Lower credit scores don’t reflect this and therefore as a means of caution, lenders charge those with lower credit scores higher interest rates. It is important to note that while many loans may not explicitly mention the minimum credit score required to qualify, they do mention whether the loan is designed for a customer with a fair, good or very good credit score. 

Even small changes in credit scores can lead to bigger savings. For instance, credit scores ranging from 550 to 679 are considered subprime for car loans. A credit score in this range can cost you an APR of up to 18%. However, a credit score of 720 or higher can put you in a much better place and potentially even offer you a 0% deal.