How Your Credit Card Use Determines your Interest Rate

Oct 9, 2009

You know all about your FICO score – it’s the credit score that mortgage lenders use when deciding if they’ll grant you a loan, and if so, the interest rate they’ll offer.

The higher your score, the less risk you present, and the lower the interest rate will be.

But the FICO score is only one of many. In fact lenders, insurance companies, and others use so many different scores that no one even has an accurate count. Small banks, utility companies, etc. use “off the shelf” scores, while huge banks pay experts to devise specialty scores just for their own use.

The behavioral score is one of those un-publicized scores. But it’s an important one, because it can determine your available credit and/or the interest rate you pay on your credit card.

Most consumers have a typical pattern of use. For instance, you may use the card for dining out. You could have a habit of eating at a moderately priced restaurant, or at a high dollar establishment. You may also use the card for clothing purchases – and typically buy at discount stores or moderately priced department stores. Or you may always shop at exclusive boutiques.

Your credit card issuer watches this, and if you do something that doesn’t fit the pattern, they notice. This can be a safeguard for you because often an unusual purchase or group of purchases will trigger a phone call to you to make sure that you are the one using the card.

One consumer I know in Washington State received a call recently asking if he had just made a large purchase at a store in Florida. Of course he had not, and the charge was rejected. This safeguard is the reason why credit cardholders are advised to let their card issuer know in advance when they plan to use their cards while on vacation.

But the same watchfulness that can safeguard your account can also cause you trouble.

If you have established a pattern of using your card for expensive clothing or 4-star restaurants, and you suddenly begin using it to buy groceries, your card issuer will assume that you have had a reversal of fortunes, and your behavioral score will change.

They’ll further assume that you are becoming more of a risk, and they’ll lower your credit limit. Then, since they believe you might eventually default, they’ll raise your interest rate.

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