Wednesday, 18 March 2015

How credit score affects interest rates?

Repayment of a loan has two parts- the principle and the interest on the borrowed amount. And thus every person who is looking for a loan tries to find the lowest interest rates possible. A low interest rate makes it easier for the borrower to repay it back as there is less interest added to your monthly payment.

Bank interest rates are not set generally but they are set up on the basis of your credit score. Banks check your CIBIL score to measure your credit worthiness i.e. the ability to repay back the loan which is one of the main factors in deciding your interest rates.

The three major credit bureaus- CIBIL, Equifax and Experian collect data from lenders and banks about your credit history and payments and they compile this data into your credit report. Banks use these reports to determine your credit worth. The better your credit score, the better interest rates you get and the lower your credit score, the higher will be your interest rate. Higher credit scores show the lender that you've handled credits well in the past and pay your dues on time and thus lower interest rates while in lower credit score, the banks see you as a high risk customer and are sceptical about you paying off your dues.

The higher risk you pose as a borrower, the higher interest rates the banks set up for you and vice versa. The range of a credit score generally is 300 to 900. A credit score higher than 750 is most likely to get lower interest rates and anything below 600 gets you higher interest rates.

1 comment:

  1. Hi,Thanks for sharing this great information regarding credit score."The better your credit score gives the better interest rates" Keeping this info in mind I can be able to improve my credit score as well as better interest rates.Really nice post