Credit Scores and Interest Rates
In a previous article on our website we discussed how credit scores work in conjunction
with your ability to get credit. You can view that article
here.
Creditors, lenders, insurance companies, even employers (if you are starting a new
job) want to know your creditworthiness when reviewing your application. We discussed
how a credit score of 620 seemed to be �the magic number.� Meaning anything below
that would be more risky while anything above this score would be more risk adverse.
Therefore, you should know what your credit score is as well, BEFORE filling out
an application for credit or employment. The best way to do that is by going to
www.annualcreditreport.com. Here
you will get a free copy of your credit report from the three major credit bureaus;
Experian, Equifax, and Trans Union.
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Your credit score is separate however and you will have to pay a nominal fee to
get that. Since all three bureaus use their own calculations as to how they come
up with your score, most lenders will throw out the top number and the bottom number,
and use the number in the middle to determine �your score.�
Creditors and lenders alike agree to lend money because they make their money charging
you interest on the money lent to you as compensation for the risk they are taking
on. Since your credit score measures how likely you are to pay back the money lent
to you, the higher your score, the better the interest rate you are likely to receive.
Conversely, the lower your score the higher the interest rate you are likely to
be charged.
Scored range from 300 to 900, however most people fall in the range of between 500
-750. Therefore, a borrower with a score of 750 or higher typically has a default
rate of just 0.20%, or 1 out of 500. On the other hand, borrowers with a score of
540 or below, are nearly 100 times more likely to default with a rate of 19.10 percent;
nearly 1 out of 5.
These �scores� help lenders know how much risk they are taking on by lending out
money to a certain individual or business. In addition, they want to be compensated
for the amount of risk they are taking on. Therefore, if you are making a major
purchase, and know what your credit score is, you can gauge where you fit with the
rest of Americans, and determine whether or not you will receive favorable interest
rate or not.
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