You may have come across many articles highlighting the importance of a low-interest rate when you apply for a loan. The numbers look so tempting that you must have also given it a thought to invest in something of your choice. The primary purpose behind offering these low-interest rates is to persuade customers to take a huge loan that will benefit the banks, other credit agencies, and lenders.
However, interest rates offered to you will depend on several factors, like your income, credit history, repayment history, etc. So, consider these factors while applying for a loan. You must also maintain a good credit score if you want your loan application smoothly approved by your bank or lenders.
What is a Credit Score?
The credit score is of great importance in determining your worthiness in the credit industry. It helps the lenders determine how capable you are of paying your credit card bills on time and provides information about your repayment history on your previous loans if any.
What does a high credit score mean?
The credit card score falls somewhere between 300-850. It is a clear representation of your past credit behavior. It gives the lenders a perspective on whether you can repay on time or default while repaying your loans. The interest rates on loans are decided based on these factors.
You’re considered a worthy candidate for the loan application if you have a higher credit score. It means you’ll likely repay on time and have a good credit history. However, a low credit score indicates that you might have either made late repayments or defaulted in the past. This will cause a hike in your interest rates by lenders.
What is the relationship between credit score and interest rates?
The Annual Percentage Rate or APR of a loan is an amalgamation of the interest rates, up-front fees, and other charges that one has to pay while acquiring a loan from the lender. The interest rates form a large part of the APR. The interest rates are highly dependent on the credit score of an individual applying for a loan. Also, different lenders will charge different fees and interest rates.
So, in most cases, the higher your credit scores, the lower your interest rates will be. They are inversely proportional to each other. Your high credit score establishes a good reputation among money lenders and helps determine your future repayment patterns.
Lending money is a risky business. One way to limit this high risk for lenders is by charging higher interest rates for late payers and defaulters. You can establish yourself as a low-risk candidate for your lenders with a higher credit score. The lesser risk you pose as a borrower, the more you’re eligible for a lower interest rate and higher loan amount.
How to maintain a high credit score?
It is essential to build a good credit score. Some ways to maintain this are:
- Pay Bills on Time
It is always beneficial to pay all your credit card bills and make repayments on time. Never miss a payment at any cost. It keeps you ahead of everyone and establishes your worthiness. You can always plan ahead for such contingency expenses and periodically keep a fixed amount to avoid defaulting or making late repayments.
- Do Not Apply for Unnecessary Credit
It is advised not to apply for a high amount of credit in a short time or for more than you need. It will be chaotic and reflect that your financial circumstances have deteriorated with time.
- Be Under Your Credit Limits
You should never exceed your credit limits. It is always recommended to use 30% or less of your specified credit limit.
Finally, always keep your credit score in check to build a good reputation for future loan applications, if necessary. With a high credit score, you’re eligible for numerous benefits. Always research lenders’ terms and conditions when applying for a loan. All the factors that make up a high credit score should be kept in mind to ensure lower interest rates for your loan.