How Much Is Bad Credit Costing You?

How Credit Scores Affect Interest Rates

Your credit score is one of the most important factors lenders use to determine what interest rate to offer you. A higher score signals to lenders that you are less likely to default, so they reward you with lower rates. A lower score means more risk for the lender, which translates directly into higher costs for you.

The relationship between credit scores and interest rates is not linear — it accelerates. The difference between a 740 and a 700 score might be only 0.3 percentage points on a mortgage, but the gap between a 660 and a 580 score can be 1.3 points or more. On a $300,000 mortgage, that 1.3% difference adds up to over $100,000 in extra interest over 30 years.

This effect is even more dramatic with auto loans and personal loans, where subprime rates can be two to four times higher than prime rates. Credit card APRs for borrowers with poor credit often approach the legal maximum, making it extremely difficult to pay down balances.

What Lenders See in Your Score

Your FICO score — the model used by approximately 90% of top lenders according to FICO — is calculated from five factors: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%). Each of these factors can be improved with the right strategy. Learn more about these factors in our guide on the 5 factors that determine your credit score.

How to Improve Your Score

The good news is that credit scores are not permanent. With targeted action, many consumers see meaningful improvement within 30 to 90 days. Here are the most impactful steps you can take:

1. Dispute Errors on Your Report

A 2012 FTC study found that 1 in 5 consumers had errors on their credit reports, and 1 in 20 had errors serious enough to result in less favorable loan terms. Review your reports from all three bureaus (Equifax, Experian, and TransUnion) and dispute any inaccuracies. Under the Fair Credit Reporting Act (FCRA), Section 611 (15 U.S.C. § 1681i), bureaus must investigate disputes within 30 days. Read our complete step-by-step dispute guide to get started.

2. Reduce Your Credit Utilization

Credit utilization — the percentage of your available credit you are using — is the second-largest factor in your FICO score. Keeping utilization below 30% is the commonly cited guideline, but consumers with the highest scores typically keep it under 10%. Paying down credit card balances is one of the fastest ways to boost your score. Our guide on credit utilization covers specific strategies.

3. Build Positive History

Adding positive accounts — such as a secured credit card or credit builder loan — and making consistent on-time payments helps strengthen your credit profile over time. You can see noticeable score improvements within one to two billing cycles of reducing utilization, and within three to six months of adding new positive tradelines. Our 30-day credit improvement guide provides a day-by-day action plan.

4. Avoid New Hard Inquiries

Each hard inquiry from a new credit application can lower your score by a few points and stays on your report for two years (though its scoring impact fades after about 12 months). Rate shopping for mortgages or auto loans within a 14-45 day window (depending on the FICO model) counts as a single inquiry. Time your applications strategically.