The Three Largest Factors In Your Interest Rate
by David E. Brumbaugh

There are three major factors that affect how much you pay for a loan. Understanding these factors can save you time, money and frustration.

1. The Federal Reserve Discount Interest Rate.

Banks and other lending institutions borrow money from the Federal Reserve Banks. The discount rate is the interest rate a Federal Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis. This rate is set by the boards of directors of the Federal Reserve Banks. The discount rate has a direct effect on the “Prime Interest Rate”, which is the interest rate on short-term loans that banks charge their commercial customers with high credit ratings. You can get live information on the current Prime Rate at www.FedPrimeRate.info.

Of the three major factors that affect your interest rate, this is the one you have the least amount of control over.

2. Your FICO Score and Credit Report.

There are companies that gather and sell information about information on where you work and live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. They are called Consumer Reporting Agencies (CRAs). The most common type of CRA is the credit bureau. Potential lenders will get your credit report from the credit bureau.

The FICO score is a method of determining the likelihood that credit users will pay their bills. It condenses a borrowers credit history into a single number.

You can protect your FICO score and credit report by paying your bills on time and not over-extending yourself. You also have the right to have false information removed from your credit report.

3. Lender Business Factors.

Banks and other lenders are in business to make a profit. They also exist in a competitive market. Like all businesses, they will balance their profit margin with competitive factors. If they charge too little, based on your credit history and the prime rate, they risk going out of business. If they charge too much, they risk losing you to a competitor. Therefore, in order to get the best deal you can, you should shop around.

Keep one thing in mind when you are shopping around. One of the things that affects your FICO score is the number of times your credit report has been accessed in a certain period of time. Therefore allowing too many potential lenders to run your credit report in a short period of time could be counterproductive. Three or four is typically a safe number. If you request an on line quote from several lenders, they won't typically run your credit report until after they have made their initial quote.

(You must explicitly provide a potential lender with permission to run your credit report. For that, they usually need your Social Security Number.)

In summary, the three major factors you pay for a loan are the prime rate, your credit history (FICO score) and business conditions such as competition. In order to get the best rate you can, you can do two things, keep up a good credit history by paying your bills on time, and shopping around for the best rate.

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  How To Boost Your Credit Score
by James H. Dimmitt

Years ago your credit score was a big secret, known only to a select few such as your mortgage and credit card companies. In 2000, Fair, Isaac Co., the major supplier of credit scoring software, announced they would begin sharing credit scores, also known as FICO scores, with consumers.

What is a credit score? A credit score is a tool used by credit grantors to determine your ability to repay your debts. The information in your credit report is compared and evaluated against tens of millions of other consumer credit reports which gives you a credit score or number ranging from 350 (highest credit risk) up to 800 (lowest credit risk). A higher score means you are less likely to make late payments or default on the credit extended to you. Your credit score will change as the information in your credit report changes over time.

Following is a short overview of the five major categories of credit information that are used in determining your credit score and guidelines for scoring higher.

PAYMENT HISTORY (35 percent)

Paying your current bills on time is the single most important factor in obtaining a high credit score. This category includes credit cards like Visa and MasterCard, retail accounts, installment loans such as those for a car or education, loans from finance companies, and home mortgages. Also included in this category are matters of public record such as bankruptcies, liens, wage garnishments, and collection accounts. The key to a higher score: Pay your bills on time!

HOW MUCH DEBT YOU CARRY (30 percent)

This category considers the amount of debt you owe on your various credit accounts. If you’ve “maxed out” your available credit, this could indicate that you are overextended financially and won’t be able to make your payments on time or repay your debts completely. This category also examines how many of your accounts carry balances and how much money you’ve already repaid. Closing accounts with a zero balance does not generally improve your score in this area. The key to a higher score: Keep your credit card balances low.

LENGTH OF ESTABLISHED CREDIT (15 percent)

The longer you’ve had credit accounts the higher you will score in this area. The age of your oldest account and the average age of all your accounts are used in determining your score. Old accounts that have gone unused are also considered. The key to a higher score: Establish good credit and keep accounts active.

APPLICATIONS FOR NEW CREDIT (10 percent)

Opening multiple credit accounts within a short period of time represents a greater risk of becoming overextended. Each time you apply for credit an inquiry is made into your credit history and these inquiries show up in your credit report. A high number of credit inquiries will lower your score.

Some inquiries are not considered in your score. These include: requests by you for your credit report, inquiries from companies for pre-approved offers or companies that already do business with you, along with inquiries from potential employers. Some requests for credit are treated as a single inquiry especially when you are shopping for the best loan rate. The key to a higher score: Only apply for and open new credit accounts when you need them.

YOUR CREDIT MIX (10 percent)

This category examines the types of credit accounts you have and how many of each. Can a person have too many accounts? Yes and no. It really depends on whether you have an established credit history or no credit history at all. The key to a higher score: Open credit accounts only if you intend to use them.

Don’t despair if you have a low score or are just beginning to establish credit. Your credit score will change for better or worse depending on how well you understand and use these five keys to your advantage in planning your financial future.

  
 

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