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bUSINESS & FINANCE

when higher credit scores don't always mean lower interest rates

10/12/2017

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In an ideal world, an excellent credit score should mean you get a lower interest rate than people who have worse scores. After all, isn’t that why people strive to pay off their credit-card bills on time? In the real world, however, that’s not always the case.

“Having an excellent credit score does not guarantee a low interest rate,” says Majd Maksad, Founder and CEO of Status Money, a company that allows people to compare scores anonymously. He analyzed 15 million credit scores from consumers — and their interest rates. In fact, 25% of accounts with excellent scores had an interest rate higher than 20% of those with lesser scores, he said. Maksad says consumers should always compare offers and push for a lower rate.

Here’s how the credit-score system is supposed to work. A credit score of 740 or higher qualifies for the best interest rates from most lenders, according to personal-finance site Bankrate.com. “It is difficult, but possible, to get a mortgage with a credit score under 620,” according to Sheyna Steiner, an investing analyst for Bankrate. “The difference between the best and worst rates can vary by a full percentage point and a half.”

But a low or poor credit score can also prevent people from getting a mortgage. “Buyers below a certain threshold, typically a FICO score of 620, have a better chance of striking oil in their bathtub than securing a mortgage,” Steiner says.

While knowing someone’s credit score doesn’t necessarily reveal whether that person has a medical or student debt or even their annual income, it does indicate whether they are eligible for a loan. A bank will look at each person’s scores — from the three major credit bureaus, Experian EXPN, +0.39% Equifax EFX, +0.04%   and TransUnion TRU, -0.22%  — and then take a couple’s average score to determine their overall creditworthiness.

And a low credit score doesn’t necessarily mean that you are irresponsible with money or even have no money. Credit scoring models look at the amount a consumer owes versus the total amount of credit available, known as the credit “utilization ratio.”

MarketWatch
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  • HOME
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