How Does Your Credit Score Affect Your Interest Rate?
Higher credit scores could help you get lower interest rates
Your credit is important for a bunch of different reasons. For example, your credit can influence whether you qualify for credit cards and loans. And not only can your credit affect whether you qualify, but it can affect the terms you’re offered too—including the interest rate.
Read on to learn how credit scores can affect interest rates, as well as ways to improve your scores to help you qualify for the best rates.
The Relationship Between Credit Scores and Interest Rates
The better your credit scores, the better your interest rates might be.
When you apply for things like credit cards or loans, your credit scores may be checked. Many companies use your scores to predict your future financial behaviors. And good credit scores may suggest you’re responsible and practice good financial habits—like paying your bills on time and paying back the money you borrow.
Think of it like this: One way lenders limit risk is by charging interest. And in the eyes of a lender, the higher your credit scores, the less risky you are as a borrower. So the less risky you are as a borrower, the more likely you are to qualify for low interest rates—and the lower those rates might be.
As the Consumer Financial Protection Bureau (CFPB) points out, this is true when it comes to all different kinds of credit products, including credit cards, auto loans and mortgages.
Credit Card Interest Rates
“The credit card company may decide which interest rate to charge you based on your application and your credit history,” the CFPB explains. “Credit card companies typically offer their best rates to customers who have the highest credit scores.”
Want to learn more about credit card interest? Check out this deep dive into how credit card interest works.
Auto Loan Interest Rates
“Your credit score(s) plays a large part in determining what kind of auto loan you can get, and how much interest you will pay for the loan,” says the CFPB.
Mortgage Interest Rates
“Your credit score is one factor that can affect your interest rate,” according to the CFPB. “In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores.”
Curious to see how credit scores and interest rates can affect the price of a mortgage? You can experiment with the CFPB’s handy Explore Interest Rates tool to get a better idea of how higher scores and lower rates could help you save.
Improve Your Credit Scores Before Opening New Credit Accounts
Remember: The better your credit scores, the better your interest rates might be. That means improving your scores might help you qualify for better rates.
Here are some ways you can improve your credit scores:
- Pay your bills on time. Your payment history is an important factor when it comes to your credit scores. So catching up on any missed and late payments—including late credit card payments—can be an important step in improving your credit. You could consider setting up automatic payments to help you make payments on time. Many companies even offer email and text alerts you can sign up for.
- Stay well below your credit limits. According to the CFPB, “Experts advise keeping your use of credit at no more than 30 percent of your total credit limit.” That’s because, as the CFPB explains, “Credit scoring models look at how close you are to being ‘maxed out.’” The closer you are to being maxed out, the worse it can be for your credit scores.
- Try to pay your balances in full. The CFPB says that you should always pay as much of your full credit card balance as you can. Paying off your balance every billing cycle is one way to help you stay well below your credit limits. And that can help you keep your credit utilization ratio down. As the CFPB explains, “You don’t need to revolve on credit cards to get a good score. Paying off the balance each month helps get you the best scores.”
- Apply only for the credit you need. “If you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed negatively,” the CFPB explains. So try to apply for credit only when you truly need it.
Speaking of applying for credit: Want a better idea of whether you might be approved? Pre-approval or pre-qualification can help you find out whether you might be eligible for a credit card or loan before you even apply.
With Capital One’s pre-approval tool, for example, you can find out whether you’re pre-approved for some of Capital One’s credit cards before you submit an application. It’s quick and only requires some basic info. And since it only requires a soft inquiry, checking to see whether you’re pre-approved won’t hurt your credit scores.
Monitor Your Credit for Free With CreditWise From Capital One
When you’re trying to improve your credit scores and qualify for better interest rates, it’s important to monitor your credit regularly. Monitoring your credit can help you see exactly where you stand—and how much progress you’ve made.
One way to monitor your credit: Use a tool like CreditWise from Capital One. With CreditWise, you can access your free TransUnion® credit report and weekly VantageScore® 3.0 credit score anytime—without hurting your score. And with the CreditWise Simulator, you can explore the potential impact of your financial decisions before you even make them.
CreditWise is free and available to everyone—even if you’re not a Capital One cardholder.
You can also get free copies of your credit reports from all three major credit bureaus—Equifax®, Experian® and TransUnion. Call 877-322-8228 or visit AnnualCreditReport.com to learn more. There may be a limit on how often you can get your reports. You can check the site for more details.
Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.
Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many credit scoring models. It may not be the same model your lender uses, but it can be one accurate measure of your credit health. The availability of the CreditWise tool depends on our ability to obtain your credit history from TransUnion. Some monitoring and alerts may not be available to you if the information you enter at enrollment does not match the information in your credit file at (or you do not have a file at) one or more consumer reporting agencies.
The CreditWise Simulator provides an estimate of your score change and does not guarantee how your score may change.