Your Credit Score and Interest Rates: How They Are Connected |
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When it comes to your credit score, interest rates
are going to be a closely related topic. Credit scores and interest
rates are tied together and you need understand how they work. Here are
the basics of how credit scores relate to interest rates.
Credit Score
The credit score is a numerical representation of your credit
history. Credit bureaus use this represent what type of a borrower you
have been. Individuals with high credit scores represent a lower risk
for lenders. If you have a low credit score, you are classified as a
high risk individual.
Risk vs Reward
When you are dealing with lending, the lender is essentially
making an investment. One of the most basic rules of investing is that
if you take on additional risk, you need to be able to potentially gain
additional rewards also. When a creditor is looking at your credit
score, they are trying to determine what type of a risk you are going
to be. If you have a high credit score, there is a low probability that
you are going to default on your loan. Because of this, they can extend
a lower interest rate. If you have a low credit score, there is a
higher probability of default. Because of this, the lender has to
charge more in interest to make up for the risk.
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