Your credit score is not the only factor that is considered in risk-based pricing models. Additionally, debt-to-income ratio, employment status, marital status and other personal factors are usually examined. The specifics of the loan also make a difference. For a mortgage, these include the loan-to-value ratio, the loan amount, the location of the property and the type of property.
Loan-to-value ratio is usually the most important of these factors. The size of your down payment will affect your interest rate. The larger your down payment, the lower your interest rate because the lender will have less to lose if you default on the loan.
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Risk-based pricing doesn’t only come into play when you apply for a loan; it can also affect your interest rate throughout the loan. This is most common with credit cards. Credit card issuers now make regular practice of checking cardholders credit reports periodically. If you have late payments to the issuer or to other creditors, it could trigger a substantial rate hike using the universal default clause. (Luckily, new credit card legislation which will go into effect in February eliminates universal default.)
The surest way to lower your risk factors, so you can get low interest rates, is to pay your bills on time and maximize your credit score. Even a single late payment can end up costing you big in higher rates.
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—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.
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