Dear Dr. Don,
I understand that the higher your credit score, the lower your interest rate. My question: Is there a standard scale for interest rates based on your credit score?
— Jamison Rates-Jump
First, thank you for asking a good question aimed at ensuring you get the best deals on financial transactions.
As it turns out, there’s no universal standard. But, a lender determines what kind of risk premium it will add to a loan based on your credit history and the information in your loan application. You can’t take a lender’s advertised interest rate for its best qualified borrowers and tack on a set premium because you’re a C credit instead of an A credit.
Credit scores and your rates
As one example, MyFico.com does show how mortgage rates vary by different credit score ranges. As I write this, the site shows that the national average annual percentage rate, or APR, on a 30-year fixed-rate mortgage for a person with a FICO score between 760 and 850 is 3.77%. For a person with a credit score between 620 and 639, the national average APR is 5.36%. The difference in interest rates shows why it’s so important to get your credit history on track before applying for a loan.
Credit histories and time
A credit score is determined by the information in your credit report. Most negative information, with the exception of a Chapter 7 bankruptcy filing, drops off your credit report after seven years. A Chapter 7 filing stays on your credit report for 10 years. Also, information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.
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