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How is interest rate based on credit score?

Whether you’re looking into applying for a loan or line­ of credit, you’ll always see an interest rate attached. An interest rate is a percentage of a loan that a borrower has to repay in addition to the outstanding balance. Interest rates can take on multiple forms, including simple interest rate or compound interest rate. An example of a simple interest loan is a mortgage.

Interest rates are in place because it does cost the lender to loan money. This rate compensates for cost borne by the lender. However, loans from alternative lenders and loans from major banks can have varied interest rates. Depending on your creditworthiness, lenders will determine a specified interest rate and will evaluate your creditworthiness by examining a credit score. In general, the better the score, the better the interest rate will also be because the lender will see you having high “creditworthiness.”

The interest rate based on credit score is important to know when looking into mortgages and personal loans. You can find the ideal interest rate as well.

The Relationship of Interest Rates with the Average Credit Score in Canada

In 2021, the average credit score ranged from 650 to 690 across major cities in Canada. Generally, the scores fall into the “good” range, but from the banks’ perspective, they are less than ideal scores.
Most Canadians have to take out a loan at some point in their lives, whether it’s a credit card, a personal loan, or a mortgage. Because recognizable financial institutions consider the average credit score in Canada as only “good” or “fair,” Canadians may not see the rates they had in mind. The effect of a credit score also varies based on the kind of loan you’re exploring.

  1. Credit Card Rates

    Interest rates on credit cards vary across the major banks in Canada, but typically, they average at 19.99%. Banks offer different types of credit cards to meet each client’s needs and lifestyle, and the rate may change according to the one you choose. For credit cards, it’s less likely that they’ll have the interest rate based on credit score since you need a credit card to build the score. However, any effect it does have won’t be revealed until an application is completed and may result in a lower credit limit than applied for. The same idea applies; good credit score holders may receive lower interest rates and may be eligible for higher credit limits.

  2. Personal Loan Interest Rates

    Private lenders are more likely to advertise a range of their interest rates than banks would. In terms of interest rate, credit score is not the only factor. Lenders will also look at your credit history, income, employment history, and assets. On top of that, the amount you ask for could also have an effect on your overall interest rate. Larger amounts naturally take longer to repay, so for the security of the lender, they may prescribe a slightly higher rate.

    Every lender is different and offers various rates and deals. Some offer unsecured loans, while others offer secured loans. Those who offer secured loans are more likely to have lower interest rates because of the collateral asset. Home equity loans are an example of this, and Alpine Credits has some options available for you to explore.

  3. Mortgage Rates

    Credit scores play a significant role in mortgage rates and home loans. Currently the minimum credit score required for a mortgage in Canada is 680, which is considerably high. Not only does the credit score determine your ability to get a mortgage, but it can also influence your interest rate. The relationship between mortgage interest rate and credit score remains the unchanged; better rates coincide with a higher credit score. The mortgage itself doesn’t hurt your credit score; as long as you make your monthly payments, you will continue to improve your score.

    Some mortgage lenders offer variable rate mortgages, which can be a riskier choice than fixed rate mortgages because rates will fluctuate with the lender’s costs of the funds that they lend. As a result, initial rates can be comparatively lower for variable rate mortgages than those of fixed rate mortgages. As the market fluctuates and interest rates change, the benefit of a variable rate mortgage compared to fixed rate will be determined. Credit score is very important in order to get a variable rate mortgage, but do keep in mind other factors influence the final interest rate.

Why Interest Rate Depends on Credit Score

As previously mentioned, there is a cost to the lender to provide loans to borrowers, and they need to have repayment security and cover the cost of the money they lend. Because credit scores demonstrate your creditworthiness and the likelihood of you paying back, lenders greatly value that score. For those who don’t quite meet the required credit score for the banks, other options are available, such as a home equity loan from Alpine Credits.

How to Get Lower Interest Rates

In general, maintaining a high credit score will allow you to have more ideal interest rates. Continue to pay your bills on time, and you build up your creditworthiness. Improving you credit score before you approach lenders would be more beneficial for your chances in getting approved and getting a lower interest rate.

Mortgage Rates with Alpine Credits

A common question that is on Canadians’ minds is how much credit score is required for home equity loans. While the major banks in Canada determine your approval and interest rates based on your credit score, income, and credit history, Alpine Credits only considers one factor, and that is the equity value in your home.

Homeowners like yourself who have paid off at least 20% of their mortgage can qualify for a home equity loan with more optimal interest rates. With a home equity loan, you can accomplish your renovation goals, pay off higher interest debts, or obtain new property. Contact someone today on our Financial Solutions Specialist Team to discuss what we can do for you or fill out our application form.