When creditors owe you money, they incur risk – risk that you will not pay on time, or even that you will not pay at all. If you fail to make timely payments, a creditor may have to spend time, energy, and money collecting debt, and if you never pay, your creditor could realize valuable losses.
Creditors agree to lend money only because they charge interest as compensation for their risk. Since your credit score is a measure of how likely you are to pay, both on time and in full (eventually), it has a major impact on your interest rates.
For example, borrowers with FICO scores of 760 or higher typically have a default rate of just 0.20%, or 1 out of 500. Borrowers with FICO scores of 539 or below, on the other hand, are nearly 100 times more likely to default with a rate of 19.10 percent; nearly 1 out of 5. Obviously, a lender will offer a person with excellent credit a much lower interest rate than someone with damaged credit. The lower the risk, the less a creditor needs to compensate for that risk.
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