AEM Mortgage Minute with Deanna Daughhetee

How Does My Credit Score Impact My Rate?

Wednesday, September 9, 2009

Your credit score is determined by your credit history, i.e. how long you have had credit, whether or not there are late or delinquent accounts, and how much debt you have in comparison to available credit. Your credit score and credit report are major factors lenders use when reviewing a customer for loan approval. The lender wants to know how financially responsible you have been in repaying other debts.

Not only does your credit score determine if you will be approved for a loan or not, but it also directly affects the interest rate you will obtain on the loan. A higher credit score means you are less likely to default on the loan, so you are less of a risk for a lender. This equates to a lower interest rate being offered to secure the loan. Conversely, if you have a lower score, you offer more risk to the lender and your interest rate will be higher to off-set that risk.

TransUnion, one of the three credit reporting bureaus, illustrates the correlation between credit score and delinquency rates in the following chart:


As you can see, maintaining a good credit score is essential for financial freedom. The higher your credit score is, the better interest rates you will earn on mortgages, automobile and student loans and even credit cards.