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The High Cost of Low Credit Scores

Credit Cards

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Over the past year, qualifying for a credit card has become easier for borrowers who don’t have pristine credit. But the rates they’ll get will be more than seven percentage points higher than borrowers with near perfect scores. Consumers with credit scores above 720 (based on the FICO score that ranges from 300 to 850) were charged 12.9% interest rates on average during the first quarter 2012, according to the latest study by CardHub.com, a credit-card comparison web site. Borrowers with FICO scores from 660 through 719 paid 17.1% on average and borrowers with scores from 620 through 659 paid 20.3% on average.

Borrowers with even lower scores who want a credit card might consider a so-called secured card, says Odysseas Papadimitriou, chief executive at CardHub.com. To get a secured card, a borrower gives the credit-card issuer what is essentially a security deposit, usually at least $200, which establishes a line of credit. Their interest rates average 17.7%; in comparison, the few regular credit cards that exist for this group of borrowers charge 30% to 36% interest.

For credit card users, interest rates kick in if they carry a balance. In that case, card users with the highest credit scores will save. With a 12.9% rate, borrowers who have a $5,000 balance on a credit card and send $150 per month toward paying it down will pay about $1,235 in interest. With a 20.3% rate, they’ll pay $2,421 in interest.

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