Do Credit Card Interest Rates Affect FICO Scores?

A FICO credit score is a three-digit number calculated by Fair Isaac Corp., or FICO, to quickly tell creditors whether a consumer is likely to be a good credit risk. FICO explains that it uses credit report information and a special formula to distill the number. Credit card data plays a big role in determining the score, but credit card interest rates are not considered.

Contents

A consumer's FICO score is based on various elements like account payment histories, balances, credit limits and credit history length. FICO considers the account types, activity and the ratio of amounts owed to available credit. The company does not factor credit card interest rates into its score calculations.

Effects

Credit card interest rates may indirectly affect a FICO score because of their impact on a consumer's overall finances. Motley Fool financial website columnist Dayana Yochim explains that rates can run as high as 32 percent annually, with interest calculated every month. Much of each payment goes toward the interest so the overall balance goes down very slowly for those who only pay the bare minimum on each statement. Their high debt load hurts their credit score, and they harm it even more if they start skipping payments because they cannot meet the minimums.

Considerations

Some consumers have higher than average credit card interest rates because of credit report blemishes. Major events like bankruptcies and repossessions harm a credit score, and FICO states that minor problems like past-due payments hurt it too. A low score means creditors often charge high interest on new credit card accounts to compensate themselves for the risk of working with subprime borrowers. Some card issuers raise interest rates on current accounts when consumers are late or skip a certain number of payments.

Solution

A request for a lower interest rate can be part of an overall FICO score-raising plan. Lisa Lazarony of the Bankrate financial website recommends contacting the credit card issuer's customer service department and simply asking for a better rate. Consumers with long-term accounts and a positive history have the best chance of getting their interest rates lowered. If they are successful, they will pay less interest each month so their balances will go down more quickly if they make the same payments. Their lower balances will help their FICO scores.

Warning

Do not ask for an interest rate reduction if you've had recent financial problems that show up on your credit reports, warns John Ulzheimer, CNBC contributor and president of consumer education for Credit.com. Card issuers often check your records before considering your request. They may give you worse terms instead of lowering your interest rate if they believe you are a risky customer.