Does a Lower Interest Rate Affect Your Credit Score?

Quick Answer

Your accounts’ interest rates don’t factor into your credit scores at all, so a lower rate won’t help or hurt your credit. However, lower interest rates can make it easier to pay off your debt and qualify for new credit accounts.

A couple working on their home finances

Lower interest rates are a reason to celebrate if you're borrowing money. Paying less interest means you'll have more money to save or spend on other wants or needs. And it can make paying your monthly bills easier. But even if these are all good things for your personal finances, the interest rate on your accounts doesn't actually affect your credit scores.

Will Reduced Interest Rates Directly Impact Your Credit Score?

Interest rates don't have a direct impact on your credit scores, and an increase or decrease in your accounts' interest rates won't affect your credit scores at all.

Your credit reports don't even show the interest rate on your accounts, and most credit scores depend entirely on the information in your credit report. This means that credit scoring algorithms couldn't consider your accounts' interest rates even if they wanted to include them as a scoring factor.

Other information about your accounts, such as when they were opened, the maximum loan amounts or credit limits and your payment history can impact your credit scores. Whether you're paying more than your minimum payments also might be a scoring factor, and this may be easier when interest rates are low.

How Reduced Interest Rates May Impact Your Credit

Even if your interest rates aren't a credit scoring factor, a lower interest rate could affect your finances, which may indirectly affect your scores and make qualifying for a new loan easier. Here's how.

  • Makes paying down some types of debt easier: Some types of accounts typically have variable interest rates, including credit cards, adjustable-rate mortgages and home equity lines of credit. If interest rates decrease, the rate on those accounts might automatically change as well. With less interest accruing, you might find it's easier to pay down your balances, which could help your credit scores.
  • Lowers your monthly payments: A lower interest rate could also lower the minimum monthly payment on your variable-rate accounts and on new fixed-rate loans. Lower payments could make it easier to afford all your bills and avoid late payments that can hurt your credit.
  • Decreases your debt-to-income ratio: Lower monthly payments could also decrease your debt-to-income (DTI) ratio, and a lower rate could lead to lower monthly payments on your new account. Although DTI doesn't affect your credit scores, it's one of several factors that creditors commonly consider when you apply for a new account.

How to Take Advantage of Lower Interest Rates

Although reduced interest rights might lead to automatic changes for your variable-rate accounts, they won't affect your fixed-rate loans. However, you may be able to benefit in several ways:

  • Look into refinancing. If you have a personal loan, auto loan or mortgage, there's a good chance the loan has a fixed interest rate. See if you can save money by refinancing those loans—taking out a new fixed-rate loan to pay off the existing debt. Refinancing student loans is also sometimes a good idea, but you may lose access to federal student loan repayment and forgiveness programs.
  • Consider a debt consolidation loan. You could also use a new, fixed-rate debt consolidation loan to pay off your variable-rate debt. Consolidating debts in this way may be beneficial if the loan has a lower rate than you're currently paying—especially if you think interest rates may increase soon.
  • Rethink your debt payoff strategy. If you're using the debt avalanche method and paying off the account with the highest interest rate first, it may be time to take another look at your accounts and make sure the current order is still correct.

There is a downside to lower rates as well. You might not be paying as much interest, but you also won't earn as much interest on your savings—even if you have a high-yield savings account. If you have savings that you won't need immediately, you could lock in an interest rate before rates drop by buying a certificate of deposit (CD).

Shop for Credit When Rates Drop

You may want to look for opportunities to improve your financial situation whenever rates drop. Perhaps you can pay down debt faster, refinance debts or use debt consolidation to save money and free up room in your budget. But no matter where interest rates are at, your credit score will also directly affect how much you can borrow and the interest rates you receive on a loan or credit card.

Improving your credit can take time, which is why you shouldn't put it off until you're about to apply for a new account. Monitor your Experian credit report and FICO® Score for free and get insights on what's helping and hurting your score the most. You can also use your Experian account to see credit card and loan offers based on your credit profile.