What happens if my credit score goes up or down?

If my credit score goes down or up whilst I have a loan - can the provider change the rate?

Interest rates for loans are based on risk. The more risk you appear to be for the lender, the more likely you will receive a high interest rate as their way of making sure they profit off of taking the risk on you.
So when you have a loan already out and your credit score changes, many people wonder if that means that the loan interest rate can or will change.

 

Will Interest Rates Change?
The most likely answer is no. There are "variable rates" that are subject to changes based on the economy, not usually your credit rating that may cause an interest rate to change.
But when it comes to interest rates changing due to bad or good credit, that - in almost every circumstance - does not occur.

Why?
First of all, taking out a loan always causes your credit score to drop a bit. If your interest rate was affected by your credit score, you would always receive a boost in your interest rate every time you took out a loan, which would be an unfair assessment by the lending agency.

Second of all, the interest rate is based on how much risk you are at the time of taking out the loan. The purpose of a credit score is to assess this risk, and causes banks to decide how much interest you are worth charging. When your credit score drops while you have a loan, your lending agency has no reason to think that your risk has changed, only that you may have missed payments on something else - possibly due to having less money each month due to monthly payments on their loans.

What if My Credit Score Increased? Can I Get My Interest Rate Lowered?
If you find that you have a better credit score now than you did previously, you cannot technically get your interest rate lowered. However, there is an option for you.

You can reconsolidate/refinance your loan, which means you are essentially taking out a new loan again to replace the old loan at a lower interest rate than you were originally paying. This is still not considered the loan interest rate "changing" while you have the loan. Rather, your credit score change and you are getting a new loan with a risk assessment based on that credit score. Refinancing your loan is not a bad idea if you have a high interest rate and it has improved greatly over the course of your loan. In fact, that simple change can save you thousands of dollars in interest, so it is well worth it if you are going to improve your interest. However, one thing to remember is that any time you take new credit or a new loan, your credit score drops a little. So make sure that you are going to be financially okay if you make that drop. Refinancing your loan for only a .3 difference in interest rate or less may not be worth the drop in your credit score, but a drop of over 1 or 2% may be.

 





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