When you need to borrow money, a lender will almost certainly look at your credit history before they decide whether or not to approve your loan. Your credit history tells the lender a lot about you, like if you pay your bills on time, if you owe a lot of money, and if you’ve ever failed to repay a loan in the past. Basically, your credit history helps determine how likely you are to repay a loan.
Your credit history is summed up into a credit score, with points added for positive credit management like making payments on time, not running your credit card balance to the limit, and showing a history of consistently repaying what you’ve borrowed. Conversely, if you’re skipping payments, making late payments, and using your maximum credit limit, point will be deducted from your credit score.
Borrowers with low credit scores will typically pay higher interest rates on loans. Borrowers with higher credit scores will get the best rate on loans. The reasoning behind offering different rates to borrowers with different credit scores is simple: the lower your credit score, the higher the risk to the lender that you will make late loan payments or default on your loan.
If your credit score is currently low and you’re not sure why, there are plenty of items to check for in your credit history and plenty of ways to improve your score. Check back next week to learn how to boost your credit score so you can qualify for lower loan rates.