Understanding Credit Card Rate Structures

I had lunch with my company’s manager of credit card sales today. He knows his products inside-out, and is always full of amazing tips for customers on how to take advantage of their credit-card features to get the most out of them.

Needless to say, buying this man lunch always pays for itself in all the great pro-tips I get out of him, many of which are gems that we’ve hidden throughout this site. This article is one of those gems, and is going to discuss how it is that your credit-card rates are representative of you as a customer in the eyes of the provider.

Without going into too much detail about the features, programs, and nuances associated with the many different kinds of credit cards out there, we’re going to examine the Five main brackets of credit cards that a company can provide.

  • The Prepaid Card Interest rates don’t really matter so much with this card, because you need to prepay anywhere from 100-150% of your balance before you can even use it. These are for (re) building credit, and are a good way to get your foot in the door with the company. They’re not pretty to use, but you’ll be thankful after a year when you have access to better credit lines.
  • The Risky Card This card comes with a low limit, and a big ugly interest rate that can reach as high as 30%. This is another credit-building card, and is meant to be tied to only the riskiest of accounts. Students are a common holder of this card, because they have yet to establish a credit history. Be sure to pay this card off monthly, and you’ll soon be able to call up your company and ask for something a bit more manageable. On a lighter note, these cards generally don’t require monthly fees to maintain.

  • The Mid-Line Card This is where credit card companies stop ripping you off, and finally start treating you like a real person. Interest rates don’t usually exceed 20% on these cards, and they generally start coming with exciting features like cash-back and rewards programs. The trick to getting approved for one of these cards is to work your way into them. If you don’t qualify right away, start off with a pre-paid or ‘risky’ card, and begin using it to handle regular bill payments.

    So long as you continue to cover your balance, you’ll build but enough credit and history with the company to move into these better tiers. A particular down-side to these cards is that they will generally require a monthly fee to maintain, even though you’re not really saving any money on rewards or interest rates yet. The benefits of building up credit through these programs are worth it though.

  • The High-Quality Card This is the card that is really useful in empowering your lifestyle. They usually come with the best of the reward programs, and will have interest rates somewhere around 8-12%. Carrying a balance is much easier to manage on these accounts, and therefore the usage possibilities are open.

    Need a bridging loan to cover the period between a bill payment and pay day? This is where to look. Although a monthly fee is required to maintain these accounts, you’ll usually find that the rewards programs associated with the card, let alone the savings on the interest rate, will more than make up the difference (a concept that will be illustrated in further detail a little later on).

  • Employee Cards Credit card companies take care of their partners. If you’re a part of the inner-circle, you get access to rates that are even more attractive than some personal loans. In general, an employee credit card will go for about prime+2%, and will have access to all the reward features of the High-Quality tier. Unfortunately, you can’t get your hands on one of these bad-boys unless you work for a company that underwrites their own line of credit cards.

So what does this all mean to us? Simply put, it illustrates what kind of incentives credit companies have to move us up into the better quality cards, and how we can take advantage of the various features associated with them. For example, it isn’t very profitable for the bank to keep a customer on a prepaid or risky card, because they don’t collect monthly fees, and they don’t make any money if the customer always pays off the balance. The bank has an incentive here to ‘promote’ you, as a customer, to a high quality card that will give you better rates, rewards, and earn them a monthly income.

With the Mid-line card, a customer begins finding some room to negotiate themselves into a better position by shopping around. If Visa offers you a lower interest rate to attract you’re business, it might be worth your time to call up American Express and ask that they bump you into the High-Quality tier to keep your business.
By keeping track of the credit company’s own incentives, you can stay one step ahead of your personal finances.