How Credit Affects my Rate

When applying for a mortgage it’s important to understand why different people are offered different interest rates. Essentially, it is simply because the lender calculates the risk involved in lending money to you. The lower the risk, the lower interest rate, and vice versa.

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There are many factors that increase or decrease the risk involved in lending money. The borrower’s income, current level of debt and loan amount are all good examples. Perhaps the most important factor, though, is the borrower’s credit health. In this article we’ll briefly discuss something borrowers often wonder: how credit affects my rate.

Your credit score, quite simply, is a measure of your past performance with debt. If you have always made payments on time and repaid credit in full you will probably have good credit. If you have ever missed a repayment on a loan or credit card, or if you have actually defaulted on a loan in the past, you will probably have poor credit.

Naturally, lenders will be more inclined to offer a lower interest rate to people who have never had problems repaying their debts, simply because they are likely to continue that performance in the future.

If you do have poor credit, there are a couple of things you can do to help mitigate the effect poor credit has on your rate. If you can afford to make a large down payment on the loan, the lender will usually offer you a preferable rate. The same is true if you reduce the amount or length of the loan. While these strategies aren’t guaranteed to net you a low interest rate, they are a great place to start.