Interest rates on credit cards are computed using a number of variables.
The most significant factor is the prime rate, which is the interest rate that banks charge their most creditworthy customers.
The prime rate is set by the Federal Reserve, and it can change based on economic conditions, such as inflation and unemployment rates.
When the Federal Reserve raises the prime rate, credit card interest rates also increase.
Credit card issuers usually add a margin to the prime rate, which represents their profit margin.
The margin varies between issuers and can range from a few percentage points to more than 20%.
Another factor that determines credit card interest rates is the consumer’s creditworthiness.
Credit card companies use credit scores to determine a consumer’s creditworthiness.