CREDIT RATING

Impact of Credit Score on Credit Card Interest Rate

Impact of Credit Score on Credit Card Interest Rate

Introduction

A credit score is a number which is assigned to you, generated by the credit bureaus by reviewing your past credit history. It helps the lenders in determining whether you have the financial strength to return the money within the given time period. In a nut shell it is like a synopsis of your credit worthiness.

Credit score is the most important aspect that determines your financial future. Carrying a good credit score is an asset and can assure you of a secured financial future. On the other hand a bad credit score will result in higher cost when you need to borrow money. There isn't much anyone can do for those who will not do something for themselves. The same is applicable for credit scores. Your prime aim is to maintain a good credit score and lead a financially planned life. (Kadlec, 2006)

Risks associated with Credit Score

Your credit score reflects your financial status and your credibility for future financial privileges. You need to be very careful about your credit score as it is the most important financial document (Adams et al, 2002). With a low credit score your credibility factor becomes risky. A respectable credit score is considered as 650 and above.

Factors that influences your Credit Score

In general the lenders who forwards credit to the borrowers buy credit reports from the credit reporting agency for their prospective applicants and customers.

The credit report contains your credit history as reported by the credit reporting agency and also the time when you availed the credit (Adler, 2002). It contains in detail the type of credit you availed, the duration for which the account was open, and whether you are regular enough in paying your bills. A broader view of your credit history is being reflected in your credit report. In fact information regarding your borrowing activities can be jotted down from your credit report. This ability to correlate all the information makes credit report highly useful.

Subprime credit cards

Credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy in the 1990s when usury laws were relaxed. These cards usually begin with low credit limits and usually carry extremely high fees and interest rates as high as 30% or more (Agarwal & Chunlin, 2003). In 2002, as economic growth in the United States slowed, the default rates for subprime credit card holders increased dramatically, and many subprime credit card issuers were forced to scale back or cease operations.

In 2007, many new subprime credit cards began to sprout forth in the market. As more vendors emerged, the market became more competitive, forcing issuers to make the cards more attractive to consumers. Interest rates on subprime cards now start at 9.9% but in some cases still range up to 24% APR.

In some situations, subprime credit cards may help a consumer ...