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How Your Credit Score Affects Your Loan Rate

Horrified young man reading wide-eyed a document with an aghast expression and his hand to his forehead.

Whether you’re applying for a credit card or personal loan, or perhaps you’re in the market for a house or new car, you should know that your credit score affects the type of loan you can get. Practically every lender will use your credit score to determine if you even qualify for a loan in the first place.

A credit score is a way for lenders to figure out the likelihood that you’ll repay the loan and how well you’ll manage your credit in comparison to other borrowers. Essentially, they’re looking at your past to see how you’ll do in the future.

Your credit score affects your ability to get a loan, or even a favorable rate, if you have a history of blemishes, which may include: serious delinquencies or collection accounts, too many new accounts, too many accounts with balances, too many credit inquiries in the past 12 months or if the proportion of revolving balances to revolving credit limits is too high.

If you’re approved for a loan, keep in mind that a lower credit score usually means you’ll end up paying much higher interest rates than someone who has good credit. When a borrower has bad credit, lenders typically charge them a higher interest rate to compensate for the fact that they represent a high risk. Again, your credit score affects your rate whether you’re applying for a credit card or a mortgage.

To prevent your credit score affecting your potential loan rates in a negative way, there are a few simple steps you can take:

  •  Pay all your bills on time – all the time
  • Keep your credit card debt to a minimum
  • If you’re going to charge something on your credit card, pay it off in full the next month
  • Limit the number of credit card accounts you maintain
  • Get a copy of your credit report at least once a year and make sure all information is correct

Now that you have a better idea of how your credit score affects your loan rates, take an active role in maintaining or building a good credit score.

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