Understanding the determination of interest rates and how prone it is to changing is good before going for a credit card. The initial interest rate is affected by three major factors:
1. Promotional offer.
2. One’s credit score
3. The ‘prime interest rate’
The factors are covered below:
1. The ‘prime interest rate’
Not everyone understands what ‘prime interest rate’ is. This is a form of baseline interest rate which can fluctuate with time dependent on specific economic variables. It has a relationship with the federal funds rate. The federal funds rate is that rate that which banks have to pay for when they borrow from a Federal Reserve for a short-term period of time. When compared to the federal funds rate, the prime rate is normally 3 % higher.
Presently, the prime rate is at 3.25 % and the federal funds rate is at 0.25 %. By signing a credit card agreement, one commits to paying the rate of interest which the credit card company has set; though it is prone to change together with the prime rate. For instance, should your current rate be 15 % and then the following month your prime rate is increased from 3.25 % to 6.25 %, it likely that your interest rate will have increased by 3 % points.
2. One’s credit score
Different rates of interest are awarded to different people. The credit card company checks the credit score of the person who applies for the credit card. Those with good scores are awarded the best (lowest) rates of interest. Though, those with average or bad credit scores are not eligible to the aforementioned rates.
3 Credit Card Promotional offers
Credit card providers are known to come up with special promotional offers which can attract people with the lowered rates if interest. This is normally as a startup for the first 6-12 months. Balance transfer offers are normally associated with this as people are offered zero percent interest rates for 6 months and after that the rates of interest increase. This is a good deal for those who want to make use of it so as to pay off their existent balance. Should that fail to materialize, you will be charged retroactively on the entire by your credit card company.
This leads us to another important factor.
4. Your credit card payment behavior
This factor only affects individuals who have signed their credit card agreement. Your interest rate is likely to be increased by your provider should you fail to pay your bills within the stipulated time. The increased amount can be a lot dependent on your current situation. Should you be having many credit cards, missing to pay for one, is likely to impact all the others.