Credit card interest rates have been rising steadily over the past few years, and everyone wants a credit card with the lowest rate. Who wants to pay more than necessary? However, the best credit card rates are given to those with the best credit scores, so anyone who wants the best rate should first improve their credit scores.
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There is also the issue of keeping the best credit card rate. Understanding the terms and conditions of your credit card is vastly important if you want to keep the best rate and minimize your interest charges.
Credit Scores Affect Credit Card Rates
Lenders such as banks and credit card companies want to assess applicants’ risk for payment. Those who are at a high risk for defaulting on payments will have to pay more to offset that risk if they want a credit card; charging higher interest rates is how credit card companies offset high risk.
In order to assess applicants’ risk, lenders use credit scores to determine each applicant’s credit history.
A high credit score is achieved through having various forms of credit that have a record of on-time payments. This shows lenders that you will be responsible for your debt and that you will pay your bill on time. Essentially, those with high credit scores are perceived to have low risk and are given the best credit card rates.
Conversely, those with low credit scores likely have few forms of credit or no credit, and they have a history of late payments and accounts that have gone into default. Such applicants are high risk for nonpayment in the eyes of lenders. Thus, they must pay a higher interest rate to get credit.
Improving Your Credit Score
If you want the best rates, you should aim for a credit score over 750, according to CNN Money. You can get a free copy of your credit report from each of the three major credit-reporting bureaus, Experian, TransUnion, and Equifax, but you will have to pay to get your credit scores.
Unfortunately, there are no quick and easy fixes to improving your credit scores. Since they are a numerical representation of your credit history, the only way to raise your scores is to have a history of on-time payments and low debt.
First, dispute any items on your reports that you believe to be incorrect or fraudulent so they can be removed. Next, pay off any accounts that have gone to a collection agency or are in default. If you are truly responsible for paying the debt, then the easiest way to get it off your report is to pay it.
After that, try to diversify the types of credit accounts that you have. You want a healthy mix of installment and revolving credit accounts. Mortgages, car loans, store credit cards, and secured credit cards will help your credit score in this area. Each account will increase your overall amount of credit. In addition, don’t close old credit card accounts even if you don’t use the cards; this will decrease your overall credit amount.
Then, make sure that you pay your monthly bills on time. This shows lenders that you are financially responsible and that you will honor your debt. Also, try to keep your overall debt-to-credit ratio below 50%. Using more than half of your credit limit looks to lenders like you are creating more debt than you can handle.
Finding Credit Card Companies with the Best Rates
After your credit scores are as high as possible, you can start to research credit cards to find those with the lowest rates.
Generally, credit cards with rewards tend to have a higher annual percentage rate, or APR.
Also, don’t be lured by a low introductory APR; it won’t last. Use the comparison calculator at SmartMoney to compare credit card offers to find the true cost per year of each credit card.
Visa offers a card with an APR of 8.99% for those with excellent credit, but most of their credit cards’ APRs fall between 11.99% and 15.24% or higher. MasterCard offers a gold card for those with excellent credit only at 9.25%; other offers start at 11.99%. Discover cards start at 10.99% APR.
Of course, the best way to avoid interest rate charges altogether is to pay off your balance in full every month before the bill is due. To do this, you must know what your credit card’s grace period is. The grace period is the amount of time you have between making a purchase with your card and paying the lender back for that purchase. If you pay your full balance within the grace period, you cannot be charged interest on the purchase amount. Credit cards with the longest grace periods, usually 25 days, give you the most leeway to avoid interest charges.
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