Banks Consider Risk

Based on the level of risk, the issuing bank will make two decisions.  First, it will decide how much credit to extend to you.  So, if you have exceptional credit and can verify that you have a high income, the bank is more likely to extend you a larger credit line than for someone with either less income, a lower credit score, or both.

Risk is Balanced By Interest

Second, the bank will need to decide how much to charge you for the use of this money.  As the risk increases, the bank will demand more of a return to compensate for the risk.  This payment is called interest.

What is the APR?

The interest that is charged is disclosed as the Annual Percentage Rate or APR.  The APR will increase or decrease, in part, on the credit risk of the applicant for credit.  Because credit card issuers make money on cards issued to people where there is very little chance of them not paying the bill, many credit card companies will compete to get their cards in these customers’ hands.  They do that by providing cards at low interest rates, with low or no annual fee, and frequently with add-ons like airline miles, hotel points, or access to travel clubs.

For those credit applicants who are less desirable, there are fewer card companies competing for their applications.  Because of that, the issuing banks are able to charge higher interest rates and more fees.  This helps compensate for the increased risk of default.