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How Lenders Use Credit Scores to Price Loans

You’ll often see loan rates displayed “as low as” because lenders use risk-based lending. That means the amount of interest you pay will vary by your credit score. Lower scores signal to the lender that more risk is associated with lending money to you – resulting in higher interest rates.

To illustrate how risk-based lending works in conjunction with your credit score, review the following chart:

CREDIT SCORE	INTEREST RATE (APR)
800 – 850	3.99%
720 – 799	4.99%
670 – 719	6.99%
600 – 669	8.99%
300 – 599	10.99%

The better your credit score, the lower the interest rate that you’ll receive. Each lender will have their own pricing tiers based on credit scores. If you plan to open a loan in the future, ask ahead of time about their tiers.

Once you know their pricing tiers, even minor improvements in your score could save you money. For example, if your credit score is 711, improving your score by only 9 points would save you 2% on your loan (going from 6.99% to 4.99% APR).

Strategies to Improve Your Credit Score Quickly

Begin by looking up your current credit score. There are many free apps and websites that will allow you to review your score, such as www.Experian.com or www.CreditKarma.com. Once you know where you stand credit-wise, utilize the following tips:

• Reduce Outstanding Credit Card Debt

Credit bureaus and lenders alike know that credit card debt can cause financial challenges for borrowers. Demonstrating that you can manage credit card balances responsibly is crucial to improving your score and reducing loan rates.

Your Credit Utilization Ratio (CUR) is a figure that shows how much credit you’re utilizing from your total available limit. For example, if you have a $1,000 balance on a credit card with a $4,000 limit, your CUR would be 25% (1,000 / 4,000 x 100). Lenders like to see this number below 25%. Individuals with exceptional credit scores typically have CURs below 7%.

Make it a priority to reduce outstanding credit card balances prior to applying for your new loan.

• Never Miss a Payment

Payment history plays the most significant role in determining your credit score. While you never want to miss a loan payment, it’s vital that all payments are made on time leading up to your loan application.

Use a calendar and schedule all your upcoming payments to ensure you’re never late. Include loans and credit card payments along with utility bills.

• Review Your Credit Report Thoroughly

While monitoring your credit score via free apps and websites is beneficial, it only gives you a partial picture. Additionally, review your entire credit report. You can obtain a free copy from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at www.AnnualCreditReport.com.

Review all the open accounts in your report, along with payment histories. Look for any errors or potential fraud. If you find anything out of place, file a dispute with the credit bureau. Addressing disputes can take time, so the sooner you review your report, the better.

• Resolve Any Collection Accounts

If you’re behind on any loan payments or are working with collectors, try to resolve these issues quickly. Most collection agencies and lenders will work with you to create a flexible payment plan, which will often help avoid negative marks on your credit report.

Additional Tips to Keep in Mind

Anytime you’re working to improve your credit score, it’s important to remember that time is your best friend. Give yourself a few months before applying for a loan to see significant improvements. Other things to consider as you work to better your credit history include:

• Avoid New Debt: Only borrow money when necessary. In the time leading up to applying for your new loan, avoid opening new credit cards or adding substantial balances to your current cards.

• Contact Lenders: Life happens, and unexpected expenses always have a way of popping up. If you’re afraid you won’t be able to make an upcoming loan payment on time, contact your lender before your due date. Most lenders are understanding and will work with you to create a payment plan that won’t affect your credit score.

• Don’t Panic: All your hard work will eventually show up on your credit report. Most credit bureaus post new marks on your report monthly. However, if you recently paid off a credit card, it might not show up on your next credit report update. If you’re planning to apply for a loan and your report isn’t updated, you can always give a copy of your current credit card bill or other loan to the lender when you apply to show the reduced balance.

• Seek Help: If you’re struggling with high-interest credit cards or other loans, contact the credit union. Consolidating debt will generally reduce how much interest you pay monthly and make it easier to manage outstanding debt.