What advantage do you have on credit cards if you have the top credit rating, the perfect credit history and no default history ever? Do you have an advantage over others, are you rewarded for being a good customer for paying on time and for not defaulting or are you placed in the same category as others?
Congratulations! You will be rewarded for being a good customer and for paying on time; you will be offered the lowest possible rate of interest on your credit cards. When the banks decide on what interest rate to charge to their credit card customers, they contact the credit bureau for the credit history and the creditworthiness of the customer. Then based on that they devise an interest rate to be charged on the credit card from their customer. This interest is charged on the amount that remains borrowed from the bank for a certain period.
It is very much evident from logic that if you are a risky client, one who is not as credit worthy as the other one. You will obviously have to pay a higher rate of interest as you are a greater risk to the credit card issuing authority than the other client who has a better credit history and is more credit worthy. It is important for the credit card issuing authority, such as a bank or a credit union to achieve a certain rate of return. To do this the issuing company would add their required rate of return to the expected loss rate, this rate is the annual expected loss resulting from default and this figure would be used to determine the interest rate to be charged on the credit card.
The banks make a particular category of people based on their credit history and predict their expected loss rate on an aggregate level, they then carry out analysis to make sure that they charge a rate, which covers their expected loss rate and makes them competitive in the market. Debt-to-income ratio is also used for determining interest rates to be charged on credit cards, this ratio is calculated by dividing the minimum payments due by the cardholder’s income. Higher debt to income clients are considered as more risky and a higher rate of interest is charged from them.
Logically if you have more than one credit card, you will transfer your balance to the card that would charge a lower amount of interest on the balance therefore some card companies to get the balance attract the customers by offering a zero percent introductory rate. Here the customer can fall in trap of the issuing authority, as they need to accumulate balance to make money, thus they offer a lower introductory rate even that of zero percent. Then they raise their rates to such a high amount that these balance transfers from one card to another proves to be very expensive for the customer therefore it is important that the customer carefully looks at the entire long term package to transfer any balance from one card to the other.