How Does Your Credit Score Impact Your Credit Card Interest Rates?

Published September 2020

“If you don’t take good care of your credit, then your credit won’t take good care of you.” – Tyler Gregory.

According to Experian, 72 percent of consumers believe that having a good credit score is important or very important. They're right. From the perspective of the financial industry, your credit score is one of the most important indicators of your financial health.

A good credit score can help you get better interest rates on your loans and credit cards, which can save you tens of thousands of dollars over the course of time and help you avoid sinking into debt. Here's what you should know about credit scores.

  • What is a good credit score? 
  • How does your credit score impact interest rates? 
  • How do credit bureaus calculate your credit score?
  • How do various debt relief options impact your credit score and financial health?

What's a Good Credit Score?

There are two main types of credit scores that lenders may review when considering lending you money, your FICO® Score (created by the Fair Isaac Corporation) or your VantageScore (created by Experian, Equifax, and TransUnion). Here's how the two stack up in terms of what constitutes a good to excellent credit score for each:

 

Creditworthiness

FICO Score

VantageScore

Excellent

800-850

780-850

Very Good/Good

740-799

661-780

Good/Fair

670-739

601-660

Fair/Poor

580-669

500-600

Very Poor

300-579

300-499

 

(Source: BusinessInsider.com)

A good or excellent credit score tells lenders that you are a low-risk borrower, highly likely to repay your debt on time. Those with good and excellent credit scores qualify for loans with most providers. Those with poor credit scores, on the other hand, may not be able to qualify for a loan at all.

How Does Your Credit Score Impact Interest Rates You Are Offered for Loans and Credit Cards?

The better your credit score, the more likely you are to be offered favorable interest rates for mortgages, auto loans, and even credit cards. That's important because slight differences in interest rates can add up over time to thousands of dollars.

Here's an example to illustrate the point. Suppose you need a $300,000, 30-year fixed loan. Remember that with a fixed rate loan, the interest rate does not change for the entire term of the loan. The chart below reveals the way the interest rate (expressed in the chart as APR, or annual percentage rate) changes with the corresponding change in credit score.

 

Credit Score

APR

Monthly Payment

Total Interest Paid

760-850

2.512%

$1,187

$127,406

700-759

2.734%

$1,222

$139,986

680-699

2.911%

$1,250

$150,165

660-679

3.125%

$1,285

$162,645

640-659

3.555%

$1,356

$188,290

620-639

4.11%

$1,450

$221,917

 

Source: myfico.com

As you can see, the APR makes quite a difference. With a credit score of 630, this loan would cost you $94,512 more than you would have to pay with a credit score of 765. 

Credit card companies set their APRs according to your credit score as well. With a FICO score of 740, you may gain access to credit cards with APRs in the 12-22 percent range. 

If your score is 600, however, your credit card APR is likely to be around 27 percent. Using high APR credit is a dangerous practice that can quickly lead to accumulating burdensome debt. 

How Is Your Credit Score Calculated? 

Credit bureaus may use different calculation methods, but they basically agree on the credit report data they use to determine your credit score. 

  • Payment history accounts for 35 percent of your credit score . This is the variable that reflects whether you have paid your credits on time. 
  • How much you owe, or how much credit you are using accounts for 30 percent of your score. Using too little credit can impact your score negatively. Being overextended is detrimental to your score as well. 
  • The longer you have been paying off debts on time and schedule, the more trustworthy you are. The length of your credit history makes up 15 percent of your credit score. 
  • If you have not recently opened too many credit cards, you are financially healthy, and probably not overextended. Your new credit accounts for 10 percent of your credit score. 
  • The more diverse your credit mix is the better. Having a mortgage, a car loan, and a reasonable selection of credit cards means that you are showing appropriate financial responsibility with several different types of credit. 

How Does Debt Relief Impact Your Credit Score? 

What happens if you are already in debt? Your credit score may already have taken a hit, and you should be aware that debt relief often comes with varying degrees of impact on your credit score as well. Some of them, in fact, can hurt your credit score for a decade. 

  • Credit counseling has the least significant impact on your credit score. Since this credit card relief method has you paying off all of your debt, its low credit score impact is hardly surprising. 
  • At the opposite end of the spectrum, Chapter 7 and Chapter 13 bankruptcies forgive a significant part of your debt. As a direct consequence, they inflict a notation on your credit report that deals your credit score a blow lasting for 10 years. 
  • Debt settlement represents the middle-road. It gets your creditors to forgive some of your debts. It does, however, lower your credit score significantly in the beginning. Its negative effects lessen as time goes by. The impact of debt settlement is more manageable than that of bankruptcy. 

Improve Your Credit Score by Getting Out of Debt

One of the best things you can do to improve your credit score is to get out of debt. If you are currently struggling to do that, a ClearOne Certified Debt Specialist can help you assess all the debt relief options for your particular situation. To find out how much you can save through debt settlement, get a free savings estimate.