What Determines The Interest Rate Credit Card Companies Charge?

Several factors affect the interest rate credit card companies charge their customers. Since interest is the way that the company generates income, they weigh many issues when making a decision whether to approve a line of credit. The interest rate credit card companies charge is important to know since it can potentially cost customers thousands of dollars.
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Q: How Do Credit Cards Work?
A: Credit cards are issued by banks, credit unions and other financial institutions. When a borrower uses a credit card with a merchant, it is the issuer that pays the merchant for the goods or services rendered. The interest rate credit card amount is how much they are charging the customer to borrow the money to pay for the goods purchased.

Q: What Methods are used to calculate an Applicant's Creditworthiness?
A: Banks get as much financial information as possible from the applicant to use for evaluation purposes. With few exceptions, all banks will check credit bureau reports to get a picture of the applicant's financial history. Most banks will require verification of income and assets to determine the interest rate credit card offers they will approve for each applicant.

Q: How Does Nonpayment Affect the Interest Rate Credit Card Companies Charge?
A: When cardholders do not make timely payments, the banks suffer financial loss. Credit card companies measure each applicant to determine which ones are likely to be profitable for the company or those that may result in losses. The calculated risks for these losses are what determine the interest rate credit card companies charge to individual borrowers based on their creditworthiness. The best interest rate credit card companies offer is to people who have excellent credit with a low risk of default.

Q: What is a Zero Interest Rate Credit Card?
A: A zero interest rate credit card allows purchases or balance transfers to be made for a specific period of time without interest. At the end of the time period, borrowers are charged the rate of interest outlined in the terms and conditions. Banks will usually offer a zero interest rate credit card exclusively to people with an excellent credit history.

Q: Can a Person with No Credit or Bad Credit Get a Credit Card?
A: It is possible for people with no credit or a damaged credit history to be approved for credit cards. The interest rate credit card companies charge these individuals are usually much higher than for people with a well established, excellent credit history. There are also secured credit cards available where customers can put up collateral such as real estate or a bank account to start or reestablish credit. The interest rate credit card companies charge for secured cards are usually not as high.

Q: What Laws Affect Credit Card Policies?
A: The Credit Card Act of 2009 covers issues relating to credit card contracts that include limits to fees that can be charged a customer for going over their credit limit, rate increases for current and past balances and application of extra payments. The Truth in Lending Act of 1968 relates to credit cards and other consumer credit. The Act monitors such issues as what methods companies use to charge interest, limits to penalties and loan cancellation policies.