If a car breaks down 70 percent of the time, would you take your chances and drive it to a big job interview across town? Probably not.

Lenders use a similar approach when evaluating an applicant for a loan and often base their decision on a person’s financial reputation: How they’ve handled credit in the past and how likely they are to pay new credit on time. To do this, they review your credit score.

Credit scores measure your credit-worthiness typically on a scale of 300 to 850. They are considered when applying for loans, insurance, and employment, and are influenced by:1

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • Types of credit: 10%
  • New credit: 10%

Payments on a loan are broken up into two categories: Principal and interest. Principal payments go toward the amount that you borrowed from the bank, while interest is paid directly to the lender for the privilege of using their money. If a loan is granted, banks use credit scores as one of the primary deciding factors in establishing an interest rate. If you have poor credit, your lender will view you as a greater risk and will assign you a higher interest rate. On the other hand, those with good credit qualify for a lower interest rate due to their substantial financial reputation.

Just remember: High risk = high interest; low risk = low interest.

The first step in applying for a loan is figuring out what your credit score is to understand what you’re working with. Next, you can determine what type of loan is best for you based on the credit scores required for each. Each lender has a unique way of assessing risk, but most use the FICO range:2

<580

Below average and demonstrates risk.

580-669

Average score for loan approval.

670-739

Above average and considered a good score.

740-799

Above average and demonstrates great reliability.

800+

Well above average and demonstrates exceptionally low risk.

Having a higher credit score is the best, and sometimes only, way to qualify for a lower interest rate on a loan and reduce your payments. At APGFCU, we pride ourselves on offering our members low rates – visit our website and see for yourself! Also, check out Bad credit: Devastating insurance rates and job opportunities for steps on improving your credit today, then give us a call at 888-LOAN-391 to see how we can help.

1https://www.myfico.com/credit-education/whats-in-your-credit-score
2https://www.myfico.com/credit-education/credit-scores