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Importance Of Comparing Low Interest Rates On Credit Cards

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In owning a credit card, the first thing to carefully scrutinize is the low APR or low interest credit card company imposes. The low APR or low interest credit card companies offer easily get the nod of those looking for an alternative credit card to own and use. However, to make sure of this there should be a point of comparison.

As of November 26, 2009, the average credit card interest rates are the following; national- 12.71%, business- 9.74%, low interest- 11.65%, cash back- 12.08%, balance transfer- 12.13%, reward- 13.29%, instant approval- 13.32%, airline- 13.60%, bad credit- 13.74% and student- 14.89%. Any interest rates above these percentages do not qualify under the category of low APR or low interest credit cards.

By giving low interest, credit card companies are limiting their profit generation in as much as interest income on credit purchases and other credit card transactions are their major sources of revenue. Generally, lower interest rates are given to those cardholders with real estate as security and high credit score. The interest rates of most credit cards are computed based on nominal annual percentage rate (APR) which is compounded on a daily or monthly basis.

In the granting of credit cards, credit card companies based their approval mostly on the credit score of the cardholder. Low interest credit cards are given to those with high credit scores while different rates will apply depending on what the credit scores reveal. Credit card companies have every reason to grant preferential low interest credit cards to those people with high credit based on the data furnished by a certain investment companies.

According to statistical reports, credit card borrowers with Experian credit score have expected default loss rates in payments as follows; more than 760- 0.2%, 720 to 759- 0.9%, 680 to 719- 1.8%, 640 to 679- 3.3%, 600 to 639- 6.2%, 540 to 599- 11.1%, and below 540- 19.1%.

Based on the default loss rates given above, it is evident that credit card holders who have Experian credit report score of more than 760 reflects the lowest default rate of 0.2%. The default loss rates then gradually increases as the Experian scores decrease. As a whole, lenders predict credit card borrowers under the same bracket of credit score to have the same pattern of payment behavior. This is the rationale behind the prerogative of credit card companies to grant low interest credit cards to those with high credit score.

Credit card companies use different approaches in their computation of expected rate of return, which is the reason why they differ in low interest credit card offers. This is also the reason why it is often suggested that comparisons be made before deciding on a particular credit card company.