Interest is what credit card companies charge you for asking them to take on risk. Particularly, the risk that you'll default on your credit card payments. And the greater the risk you pose as a borrower, the higher the credit card interest rate.

Of course, there are numerous ways credit card companies assess the risk you present as a borrower. However, for most creditors, this is where your credit score comes in. Your credit score is a three-digit numerical representation of your creditworthiness as a cardholder. In other words, it represents the likelihood you'll repay a debt.

To that end, your credit score is what credit card companies use to determine your credit card interest rate. In this article, we'll be taking a look at how your credit score affects your credit card interest rate.

Why Your Credit Card Interest Rate Matters

As mentioned, interest is the price you pay for borrowing money. And what credit card companies charge you to compensate for the risk they're taking on by lending to you. Credit card interest rate matters because it determines how expensive borrowing from your credit card gets.

To explain, let's assume you have a credit card with a 22% interest rate. If you use your credit card to make a $2,000 purchase, you'll need to repay that amount plus interest. In this scenario, with a 22% credit card interest rate, you'll pay an additional $440 on top of your $2,000 debt.

For this reason, you'll want to have a higher credit score. The reason: the higher your credit score, the better your credit card interest rate. In fact, the average interest rate for borrowers with excellent credit scores is 9% less than for borrowers with fair scores. And using the previous example, that's a $180 difference in interest payments.

How Credit Card Companies Determine Interest Rates

Of course, your credit score plays a huge role in how credit card companies set your credit card interest rate. However, there are other factors that influence credit card interest rates as well. Bond prices, the state of the economy, and even the credit card you're applying for- all affect the credit card interest rate.

That being said, there are factors that are in your control. For one, your income. But more specifically, it's how your income relates to your other debt obligations. Enter your debt-to-income (DTI) ratio. DTI refers to the percentage of your gross monthly income that goes towards your monthly debts. And the higher the ratio, the higher the credit card interest rate.

The Bottom Line

In summary, interest is what you pay your lender for letting you borrow. And it's what lenders charge you to compensate for the risk of lending to you. Interest rates, on the other hand, dictates how much interest you'll pay each billing cycle and in total. And the higher the interest rate, the more expensive a loan or credit card can get.

Fortunately, getting a low-interest loan or credit card isn't as difficult as some people make it out to be. In fact, it may only take correcting or removing a couple of items from your credit report. Particularly, incomplete, inaccurate, and fraudulent items. Call us at 888-799-7267 to schedule a Free Credit Consultation.

 

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