Title:
How Credit Card Issuers Use the Prime Rate
Word Count:
376
Summary:
When you get a credit card offer in the mail that says you are pre-approved, what is the first thing you look
at on the letter? The interest rate, right? And when you get an offer from a credit card company after filling
out an application either through the mail or online, what is the first thing you want to know? The interest
rate.
Keywords:
0 APR credit card , credit cards
Article Body:
When you get a credit card offer in the mail that says you are pre-approved, what is the first thing you look
at on the letter? The interest rate, right? And when you get an offer from a credit card company after filling
out an application either through the mail or online, what is the first thing you want to know? The interest
rate. This rate determines how much money you will have to pay for past due balances each month. It can
make the difference between paying a few dollars and a few hundred dollars every year.
So how do credit card companies determine which rate you get? And why is it different for different people?
Well, the simple answer to the last question is that the better your credit is, the better rate you get. But we’ll
look at that again in a minute.
First, each credit card company that offers a variable interest rate credit card uses a base interest rate to start
with. This base rate is usually the prime rate, which is the rate charged by major banks to their most
creditworthy customers. The Federal Reserve Board sets this rate and it can up or down depending on the
economy. A slow economy means a lower rate; a flourishing economy means a higher rate.
So if you apply for a credit card, the company will check your credit score. This score is determined by
many factors, including your payment history, you available credit, and the amount of your debt. If you have
a high credit score, meaning a good history, the credit card company will add on a lower percentage rate, or
margin rate, to the prime rate to determine the interest you pay on your card. If you have a low credit score
due to bankruptcy or other poor credit history, the credit card company will add on a higher margin rate to
the prime rate.
For example, if your credit is good, the company may take the prime rate of five percent and add on their
margin rate for good credit at three percent. This means you pay eight percent interest on your new card.
Your interest rate will change anytime the Federal Reserve changes the prime rate.
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