Does Your Credit Score Determine Your Interest Rate?

5 Min Read | Last updated: October 15, 2023

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This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

Interest rates may be based on your credit score, as well as other factors. Typically, the higher your credit score, the less it may cost to borrow money.

At-A-Glance

When you borrow money, the interest rate you’re charged depends on your credit score, at least in part.
Boosting your credit score could save you money over time in lower interest payments.

Lenders and creditors require you to pay back what you’ve borrowed, plus interest, on a loan or credit card balance. The interest rate you’re charged is typically based on your credit score and other factors, which measures the level of risk you represent to a lender when it comes to paying back what you owe.

Having a strong credit score is one factor that could help you qualify for a lower interest rate, and vice versa. In practical terms, the difference between a lower interest rate and a higher interest rate can add up to tens of thousands of dollars over the life of a large loan.

Credit Score and Interest Rate: A Closer Look

Creditors typically rely on a person’s FICO credit score when reviewing a loan or credit card application. FICO scores range from 300 to 850, with five credit score ranges, starting with “very poor” (300 to 579) going on up to “exceptional” (800 to 850). Various factors determine the terms of any financial deal, including payment history, amounts owed, and length of credit history, but your credit score is a key element in determining your interest rate.

The interest rate is the amount you are charged to borrow from a creditor in addition to the principal or balance. The amount of interest you pay will vary depending on the type of loan or credit that you apply for and your creditworthiness. In most cases, if you have a lower credit score, the creditor may consider you a high-risk borrower and charge a higher interest rate. If you have a higher credit score, you may be regarded as low-risk and could receive a lower interest rate.¹

Do Credit Scores Impact Your Interest Rates?

Credit scores, along with other factors, can impact your interest rates and contribute to the amount of interest that creditors decide to charge you.

Here’s a look at how this breaks down:

Credit Card Interest Rates
Credit card companies may determine what interest rate to charge you based in part on your credit score. Typically, a higher credit score may help you to secure a lower interest rate.
Car Loan Interest Rates
Your credit score could play a significant role in the type of interest rate you’ll end up paying for the loan.
Mortgage Interest Rates
Thinking of buying a house? Your credit score can impact the rate that you’re able to secure on a mortgage. Typically, homebuyers with higher credit scores may qualify for lower interest rates.

How to Boost Your Credit Score and Lower Your Interest Rates

What if your credit score is not as high as you’d like? The good news is you can improve your credit score over time. Here are a few ways to get started:

Pay your bills on time. Payment history accounts for 35% of your overall FICO score.² In terms of credit card bills, if you pay at least the minimum balance due each month, in all likelihood, you will score well on this metric. Signing up for automatic bill pay for your credit card and loans can help you avoid missing payments.

Don’t overuse your credit cards. Every credit card you’re given has a maximum credit limit, which is the biggest balance you’re allowed to owe, but it’s a good idea to keep your credit utilization rate low. Amounts owed counts for 30% of your FICO credit score, so try to only use a sensible amount of your available credit.
Monitor your credit report regularly. Monitor your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion, either by using a credit monitoring service or on your own. Free credit reports from the three bureaus are available at annualcreditreport.com.³
Dispute errors on your credit report. Look for errors that may cause your credit score to lower, like a misspelled name, wrong address, or incorrect account balance. If you discover a mistake, you may file a dispute to fix it.
Look for unauthorized accounts or hard-credit checks. They can be signs of identity theft – in which your personal information has been used by a thief to apply for a loan or credit card in your name – and can damage your credit score.

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The Takeaway

Your credit score, along with other factors, plays a large role in determining the interest rate that creditors charge on loans and credit cards, so it’s worth taking steps to help build strong credit.

¹ “Interest Rates: Different Types and What They Mean to Borrowers,” Investopedia

² “What is Payment History?,” My FICO

³ “AnnualCreditReport.com,” Experian, TransUnion, Equifax

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Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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