Saturday, December 25, 2004

How Do Credit Card Companies Determine the Interest Rate Charged?

The interest rate on your credit card is the percentage of your balance the issuer charges you each billing cycle. Your credit card costs you more over time and usually takes longer to pay off if you have a high interest rate. A combination of factors, including payment and credit history, determines the interest rate you are charged.

Creditworthiness

    Your creditworthiness is a significant factor in the interest rate you are charged on your credit card. Your credit score, a number assigned to you based on your credit history as reported by the major credit bureaus, is reported to the credit card company when you apply for an account. The lower your score, the higher the amount of interest you will have to pay. Credit card companies usually assign an interest rate based heavily on the score range in which your score falls.

Income

    Your monthly income is considered when determining your credit limit and interest rate. You may receive a higher interest rate even if you have good credit if your household income is considered low by the creditor. That's because you are viewed as a higher risk to the company.

Payment Status

    Your credit card has a default interest rate, which is the rate the company charges if you fall behind on your payments or when an introductory rate expires. A credit card company can charge you the default interest rate once you are at least two months behind on your payments. You can earn your original rate back in a delinquency case if you make at least six months' worth of payments on time.

The Economy

    The current level of inflation and the health of the financial market impact interest rates offered by credit card companies in general. Your credit card company may increase your interest rate when the market slows to make up for lost customers or a higher number of defaulted accounts.

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