Lenders use credit scores to estimate the risk that a loan will not be repaid. A higher score generally leads to approval on better terms; a lower score can mean a higher rate, a larger down payment or a denial.
What a rate difference costs
Small rate differences are large in dollars. On a $320,000 30-year mortgage, a 1-point lower rate cuts the monthly principal and interest by about $200 and the total interest by tens of thousands. Compare scenarios with the mortgage calculator using different rates, and do the same for an auto loan or personal loan.
What goes into a score
Scoring models weigh payment history, how much of your available credit you use, the length of your credit history, new credit applications and your mix of accounts. Exact formulas are proprietary and differ by model.
Before you apply
- Check your credit reports for errors at annualcreditreport.com and dispute mistakes.
- Pay down card balances to lower utilization.
- Pay every bill on time.
- Avoid opening new accounts right before applying.
- Shop rates within a short window; multiple inquiries for the same type of loan are often treated as one by scoring models.
Scores are only part of underwriting. Income and debts matter too; see the debt-to-income ratio calculator.