Credit Influences the Debtor’s Interest Rate

by Jackson R. Web Marketing

There are two important aspects of loan money – the principle and the interest! When you take a loan, the interest rate has a big impact on the amount that you pay back each month. It is easier to pay off low interest loans because lesser amounts add up to the sum that you have to pay back each month. This is why most people seek low interest loans from banks.

You need to know that the interest rates set on credit cards and loans are set after proper evaluation, and not at random. Banks use your credit score to evaluate what rate would be best for you. The credit score serves as the number that can measure your credit worthiness. It is one of the primary factors, which helps decide what rate to fix for your loan.

How Banks Work With Credit Scores

Your FICO score (which is your credit score) should range between 300 and 850. The higher the credit score is, the better it is for you because it indicates that you handle the credit very well and pay the loans on time. If the score is low, it indicates that you do not make payments on time and probably make partial payments.

When you take a loan, the Annual Percentage Rate depends on how much of a risk you are for the lender or bank. The more the credit risk (lower credit score) the higher the interest will be, and you will qualify for only small loans. In fact, if the credit score is too low, the bank or lender can decline your application altogether. The better the credit score, you can apply for higher loans.

Your Credit Card Rate and Credit Score

When you get a credit card, the issuer tells you about a range of potential interest rates that you can get. Some credit card issuers allot 13.99-22.99% APR (Annual Percentage Rate), and this varies with the creditworthiness. Your APR will fall within this range and it depends on your credit score and other risks attached with your financial stability.

The card issuer will not advertise what credit score will give you an exact interest rate. That’s because there will be no interest rate until you apply for the credit card. Generally, if you have a good credit score, you will receive a low APR, but if your credit score is bad, then you will receive a higher APR.

What Happens with Bad Credit Score

Banks will ask you to provide them with a copy of your credit score, and your application for loan may receive approval – BUT at very high interest rate. This not a favorable situation and the bank will also ask for more details to explain why you have unfavorable credit score.

To make sure that you get a good interest rate that can let you take life easy, work on your credit score before applying for the FHA loan. This is very important in order to increase your get over the loan within the shortest time.