How to Get a Good Interest Rate with Average Credit

When you’re in the market for a loan or line of credit, one of the key factors used to determine whether you’ll be approved and at what interest rate is your FICO credit score. That three-digit number holds a lot of power when it comes to the major financial purchases in your life. For this reason, a lot of people want to know what is a good credit score. That depends on the type of credit you’re seeking, but generally a score of 720 or higher is considered ideal to get the best rates. And if you don’t know your score, there are several easy options to get your free FICO score.

If you don’t have good credit, there still are some things you can do to improve your chances at getting a good interest rate. The key is to remember that creditors will be evaluating the likelihood that you will repay in full the loan or line of credit. While your FICO score matters, there are other factors about your financial life that matter, too. So if you find yourself teetering on the line of a good interest rate, make sure you have these six things in order.

(1) Steady Employment – Simple enough right? Any creditor that is considering lending you money needs the assurance that you will pay it back on time. And while a source of income is critical, creditors look at more than just whether you have a job. They also consider how long you’ve worked at your current employer. So if you’re considering changing jobs, you may want to get that car loan first. Why? A long employment history shows the creditor that you are reliable and can hold down a steady job. As a result, you are considered less of a credit risk, and may enjoy a lower interest rate as a result.

(2) Increase Savings – While your income is critical, creditors also want to see that you can survive a shortfall in income. Showing a potential creditor that you have at least three months worth of expenses saved reduces the risk of non-payment. And this factor is particularly important if you are applying for a mortgage. So if you haven’t already, open a high interest savings account and begin saving today. Even a small amount saved each month will eventually grow into a sizeable nest egg.

(3) Increase Your Household Income – While increasing your income is easier said then done, it is a critical factor evaluated by all creditors. Whether you find ways to earn extra income on the side, work overtime, or perhaps become a two-income family, increasing your income will increase the amount you can borrow and it may decrease the interest rate you’ll pay.

(4) Lower Your Debt – Called the debt-to-income ratio, creditors look to see how much of your monthly income goes to paying off debt. This debt includes credit cards, car loans, school loans, and mortgage payments. By lowering your debt, you can lower the amount of your monthly income that you must set aside to make debt payments. If you can pay off more debt just before applying for a new loan, creditors can see a lower debt-to-income ratio, which should increase your chances of obtaining a new line of credit while lowering your interest rate. Paying off some debt can also be an effective way to lower your interest rate when seeking to refinance a loan.

(5) Add a Cosigner with Excellent Credit – If you’re still nervous about not receiving the best interest rate on your money, add a cosigner that carries excellent credit. By adding a cosigner, the creditor now has two parties responsible for the debt, lowering the risk of not collecting. And because the cosigner has excellent credit, creditors are more convinced that payments will be made on time. Hopefully, this action will also keep you in check, because should you miss payments now, you’re ruining the credit of a friend that helped you out. Certainly not a situation you want to be in.

(6) Increase Your Down Payment – The larger the down payment you make on a car or house, the lower the interest rate. By increasing your down payment, you decrease the risk for the creditor. In some cases, like financing a home, there are minimum down payment requirements just to qualify for the loan. But as you increase the amount of your down payment, you’ll also find the interest rate you qualify for going down, too.
Obtaining a quality interest rate with an average credit score isn’t as difficult as it might sound. The hard part comes in knowing just what your creditor is looking for when reviewing your application, as there are a variety of factors that they consider. To cover all of your bases, make sure to keep an eye on your credit score routinely to check for errors and to monitor your progress. When it comes time to apply for the line of credit you need, work your way through the points above and you should be well prepared.

This Post comes from DR, founder of the popular personal finance site

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