How Your Credit Score Affects Your Borrowing Power

How Your Credit Score Affects Your Borrowing Power

As a financial institution, the single best way to determine if people are going to make their loan payments regularly and on time is to take a look at their credit scores. Because of this, when someone has a particularly poor credit history, it can be more difficult for him or her to secure a loan.

Read on as we take a deep dive into how your credit score affects your borrowing power.

What is a Credit Score?

A credit score is a numeric representation of your credit history that ranges from 300 to 850. The higher your credit score is, the better your credit history. If you have a lower credit score, it means that you’ve previously done something that causes lenders to doubt your ability to repay a loan. This can include making late payments, using too much of your credit or simply not having enough credit diversity. Regardless of what caused your credit score to dip, having a low score can significantly impact your ability to borrow money.

Higher Interest Rates

Lenders usually offer something called “risk-based pricing.” Generally speaking, this means that, the lower your credit score is, the higher your interest rates will be whenever you take out a loan. You might be wondering what impact that has on your bottom line. It means that your mortgage payments will likely be higher, and your vehicle, home or other items for which you’re borrowing will end up costing you more. By maintaining a higher credit score, you can enjoy a lower interest rate from your financial institution.

Loan Rejection

If you have a low credit score, you may be hard-pressed to find a lender who will offer you a loan. Often times, financial institutions decline borrowers with poor credit history, forcing them to find a cosigner or some other method of obtaining the money. This prevents many people with poor credit from receiving the loans necessary to own a home or purchase a vehicle.

Lower Credit Limits

Another problematic side effect of having a particularly low credit score is that it has the potential to drastically lower your credit limit. Your credit limit determines just how much a bank or credit union is willing to lend you on an individual line of credit. In addition to limiting your spending power, this can further damage your credit score by increasing your credit utilization rate, also known as your balance-to-limit ratio. The lower your utilization rate, the less of a risk you represent to potential lenders.

Regardless of what your financial plans are for the future, it’s in your best interest to keep your credit score in good condition. The best ways to do this are to pay your bills on time, keep a lower credit utilization rate (less than 30 percent) and to have several diverse types of credit available to you. If you follow these simple steps, you’ll be on the right track to improve your credit score and increase your borrowing power.

Working with a local lender who has your best interests in mind is step one—let’s talk about your healthy lending options with Sioux Falls Fed.