Your Score by Anthony Davenport Matthew Rudy

Author:Anthony Davenport, Matthew Rudy
Language: eng
Format: epub
Publisher: Houghton Mifflin Harcourt (www.hmhco.com)

What Score Do You Need?

Once you’re placed into a certain qualification bucket based on your credit score, your rate will be tied to the prime lending rate—the average rate at which the top commercial banks are lending to their best customers. Credit card companies base their rates on that rate and have a spread of around 12 percent between the prime rate and what their best customers pay. The spread obviously gets bigger if they think you’re a bigger risk—but everybody’s rate goes up when the prime rate increases. And starting in 2015, the prime rate began to rise again after having gone down continuously since 2006.

The third factor that affects your rates is the most challenging one because it’s the only one that isn’t transparent to you, the borrower. Each credit card company that issues you a card is doing what amounts to a two-year backward-look analysis of your spending and credit. It’s monitoring every aspect of your credit report, along with how you use not only its credit card but all the other credit cards you own, too. It’s watching how much you spend, how much you carry in balances, and how much you pay off in various cycles.

All of that information is constantly being crunched by various algorithms that are designed to predict how you’ll behave over the next two years. If the algorithm predicts that you’re going to be a worse credit risk, your interest rate will go up and your credit limit may go down. This is designed to do two things—to keep you from spending more money and to make sure the credit card company gets paid for what you do spend.

One call I get at least weekly comes from clients in a panic because their credit line was decreased, even though they made all their payments on time with that creditor. They want to know why, and I always tell them the same thing. It’s a sign that that creditor has found something in the past two years that would indicate you’re now more of a risk—a late payment, another card that’s maxed out, or some other kind of ding that has showed up on your credit report. Any one of those reasons gives any of your credit card companies the ability to jack up your interest rate to the maximum amount—because they can. (If it happens to you, you need to review your credit report and see if there are any derogatory items reported or if there’s been some kind of fraud.)

The algorithms are also insidious, because they predict how easy or hard it will be for you to go out and get a comparable credit card at comparable rates with a comparable credit line. If a card company can see that you are unlikely to be able to get another line like the one you currently have, it isn’t going to worry very much about losing your business by raising your rate.

We’ve talked a lot throughout this book about the hit

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