Credit card interest rates impact your minimum monthly credit card payments and the total cost of using credit cards. When banks determine credit card interest rates, they take your financial situation and credit history into account. Marketing promotions and economic factors also play a role in determining credit card interest rates.
FICO Score
Creditors consider your FICO score when determining credit card interest rates. FICO scores take length of credit history, payment history, amounts owed, new credit and types of credit used into account to provide an overview of your credit-worthiness. MyFICO reports that payment history and amounts owed receive heavy consideration in the calculation of your FICO score. Low scores lead to high credit card interest rates, while high scores lead to reduced rates and special rate promotions.
Debt-to-Income Ratio
Your debt-to-income ratio gives credit card companies a picture of your financial situation by comparing the amount of debt you carry with the amount of income you earn. Debts include monthly rent or mortgage payments, monthly car loan payments, minimum monthly credit card payments and other monthly loan payments. Income includes your gross salary, bonuses, overtime payments, alimony received and any other income you receive. An ideal debt-to-income ratio is 36 percent or less, according to NODA Federal Credit Union.
Payment History
Your payment history with individual credit card companies plays a role in the interest rates you pay on each credit card. Keep your interest rates down by making your payments on time and never exceeding your credit limit. Interest rates will increase if you pay less than the monthly minimum, miss payments or exceed your credit limit.
Promotions
Credit card companies offer promotional interest rates to entice consumers to sign up for their cards. Some credit card companies offer a zero percent interest rate for six to 12 months. When this promotional period ends, the companies increase the rates to bring them more in line with the rates of other cardholders.
Economic Factors
Changes in the economy influence credit card interest rates. Banks set credit card interest rates based on the prime rate, which is the rate banks charge customers with the most credit-worthiness. Since customers with high credit-worthiness have a low risk of defaulting on their loans, banks charge them lower interest rates than customers with a higher risk of loan default. Investopedia reports that the prime rate depends on the federal funds rate, which is the interest rate one bank charges another bank to borrow money. When the Federal Reserve changes the federal funds rate, the prime rate changes, and banks increase or decrease credit card interest rates.
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