What Your Score Affects

Your credit score doesn't just affect whether or not you get a loan; it also affects how much that loan is going to cost you. As your credit score increases, your credit risk decreases. This means your interest rate decreases.

As your credit score increases, your credit risk decreases.

This chart shows an example of how interest rates for a car loan can vary based on your credit score:


FICOŽ Score
Auto Loans
500-589
590-624
625-659
660-689
690-719
720-850
36-month new auto loan 18.597 16.206 12.225 9.498 7.386 6.674
48-month new auto loan 18.598 16.206 12.226 9.500 7.390 6.678
Source: myFICO.com

There are other factors that influence the interest rate you get for a loan besides your credit score. Things like the type of property you are using the loan to buy, how much of your own money (equity) is going into it, the costs the lender has to make the loan, etc.

In addition to banks and lenders, there are landlords, merchants, employers and insurance companies jumping on the credit score bandwagon. Of all of these, the fact that insurance rates are being determined by credit scores is causing consumers the most alarm. To most, it seems that your credit history and your driving record have little in common. Insurers, on the other hand, have found that using credit scores to predict how likely someone is to pay premiums has helped them cut their losses. They don't use the same score that banks and lenders use, however. They use a slightly different formula for their calculations and actually call it an "insurance score."

Insurers' use of credit histories to determine rates is under scrutiny nationwide. Many states are passing laws restricting this practice -- 49 states regulate it in some way. Check your state's department of insurance Web site to see where your state stands on the issue at this map from the NAIC. 

Most state legislation prohibits insurers from using the following criteria to determine rates:

  • No credit history
  • The number of credit inquiries
  • Credit used for medical bills
  • The addition of new loans
  • The type of credit, debit or charge card used
  • The amount of credit held