Does APR also depends on credit score?

Question

I know that a good credit score means access to higher credit limits, but how the APR is affected? While I always pay off the whole balance on my credit card, but I am interested in lower APR, because believe this means I have a better credit score? Is that true?

Answer 1

The credit terms you are offered (typically) depend upon your credit score, but your credit score does not directly depend upon your APR/terms. Your credit score is determined by several factors, and credit scores are used 10 Billion times each year to make credit decisions worldwide. The following list of factors are combined to form your credit score,

• Payment History 35% (pay on time, single late can lower score 100 pts)
• Credit Utilization 30% (keep below 10%, still ok below 30%)
• Age of Credit History 15% (best is 11+ years)
• Credit Types 10% (Credit cards, Retail, Installment, Mortgage, Student loan)
• New Credit 10% (dinged for new accounts for first 3-6 months, pace yourself)
• Derogatory Entries: Bankruptcy, Foreclosure/Short Sale, Judgement, Reposession, Charge-offs, Collections, and Settlements

Here is a chart that shows the factors that contribute to credit score, and their percentage impacts myFico Credit Factors, and here are more explanations at CreditCards.com and Investopedia.com. Search using the query, "what are factors that comprise credit score".

Credit terms are typically offered based upon credit tiers (each credit grantor has their own rules), but generally 760+, 720+, 660+, 620+, are typical. You want a good credit score for access to better terms. Terms may include down payment required, interest rate (APR), amount of credit extended, and duration of repayment allowed. You want to qualify for great terms.

Follow these rules and you will have good to great credit:

• Payment History: Pay your loans and credit cards on time
• Credit Utilization: 2-4 cards, use < 10% of credit limit, pay twice/month
• Credit Age: auto loan, mortgage, open and keep 2-4 credit cards, obtain a personal loan
• Credit Types: you want an auto loan, mortgage, 2-4 credit cards, personal loan, and student loan
• New Credit: pace yourself to only apply for or open one new account every 6-10 months (or less frequently)
• Negative: avoid foreclosures, short sales, bankruptcies, judgements, etc. pay your debts.

Please note that the credit scoring system has large impacts for negative items. Foreclosure could cost 200 points, Short Sale could cost 150-200 points, Bankruptcy could cost 200-300 points, may drop your score below 500 and the lack of positive credit entries could keep your score low for years. Judgements, Collections, Charge-offs and Debt Settlements will drop your score substantially (50-100 points).

A single late payment could cost an otherwise great score 80-100 points, and several late payments will further reduce your score. Recent late payments affect your score more than older late payments. Since a Foreclosure, Short Sale, or Bankruptcy would probably occur after several late payments, these events would combine with the late payments to severely reduce your score. Collections, Charge-offs or Settlements would also only follow after several late payments.

Please note that the system is not a linear system, and a single late payment or other negative event has larger effects for higher scores than for lower scores, and a recent entry has higher effect than an older entry. Many events age off your credit history after several years, but new negative entries would restart the process.

The system does not exhibit a "normal"("gaussian") distribution, and thus does not act the same way you might expect a grading system to act. When you search for distributions of scores across the (U.S.) population, you find that many people have much lower scores than one might expect from the credit score "prediction" of imminent default. One might even conjecture that scores are biased towards reporting a more dire view of credit behavior than one would expect from observation of experience.

Answer 2

I'm not sure if this answers the question you're trying to ask, but...

Your credit score may affect what interest rate you are offered (or what yearly fees are quoted) when you're shopping for a credit card. I have never heard of them dynamically altering the interest rate on an existing credit card account.

If you're always paying off the whole balance, the interest rate on the card is almost irrelevant.

Your use of the credit card may affect your credit score. But there's usually little point in actively trying to manipulate your credit score unless you have a specific reason for doing so. So I'd suggest you just keep doing what you have been doing.

Answer 3

Yes. Your credit score (among other things) affects how low or high your APR will be on a credit card. However, this APR is not fixed throughout the lifetime of the credit card; the APR can change due to certain events, like a missed payment.