If you’re considering a home loan, school loan, or auto loan, preparing for the application process is critical. More than understanding how much loan you need, it is vital that you know your credit score. The state of your credit score influences your interest rates more than any other factor. Here’s why.
How Credit Scores are Used
Stated by a credit repair Houston expert, when you apply for a loan from a lending agency, they are going to look at your financial history and determine whether you are a qualified candidate. The best way for agencies to determine the amount of risk they take lending you a loan is by checking your credit score.
Your credit score tells banks and other financial institutions how likely you are to pay back your loan. The better your score, the more confident a lending agency can offer you a loan. This number does not only affect how much loan will be offered but also the interest rate you will receive.
What Score Do You Need?
Credit scores are generally broken down into six categories:
Very Poor: 300-560
As you can see, the higher your number, the better your score. When it comes to interest rates, the higher your credit score, the better interest rate you will receive, as well.
Wondering if a few-point difference impacts your interest rate? Take a look at these average mortgage rates along with their qualifying credit scores.
For this example, we’ll say you want to borrow $200,000 for a 30-year mortgage.
As you can see, there’s quite a difference from interest rates obtained by those with excellent credit scores compared to those in the low end of fair to poor. While a few decimal points may not seem like a big difference, over the life of your loan, you’re looking at thousands in savings if you can bump up your credit score before you apply for your loan.
How To Improve Your Score
Now that you see how interest rates and credit scores correlate, you can determine if you need to bump up your score. If so, there are a few simple ways to improve it.
1. Pay all bills on time. Missing even one payment can lower your score by 50-100 points.
2. Only use 30% of your total credit. If your credit card has a $1,000 limit, only use $300 at any given time.
3. Pay off debt. The less debt you have, the better your score will be.
Go After the Best Rates
Once you know what your credit score is, go after the best interest rates available to you. If you don’t need to take out a loan right away, spend time improving your credit score until it’s in a favorable range for your loan. We hope these tips help you to prepare for your loan buying journey.