Suppose your friends, Mary and John, received their first credit cards with iden
ID: 1174329 • Letter: S
Question
Suppose your friends, Mary and John, received their first credit cards with identical features. Mary uses her card extensively to make purchases, always paying the full balance in a timely manner so that she incurs no interest cost. John pays for everything in cash, reserving the credit card only for an emergency that never happened.
After two years, your friends apply for a new credit card.
Explain why Mary is offered a new card at a much lower interest rate than John, despite of the fact that they have similar jobs and make the same amount of money.
Explanation / Answer
When you pay on time and in full, the bank considers you a well-behaved customer, and will report this behavior to other companies that evaluate whether you’re a good borrower. You want these companies to consider you a good borrower, because it could have financial consequences in the future.
It's important to continuously use your credit cards every month, even if you only use it for small and insignificant purchases. Credit bureaus like to see that you can use your credit card, hold a balance for a short time, and then pay it off in a timely fashion. Making sure that you utilize your revolving credit is a big factor in not only maintaining your credit score, but raising it.
You might think they’d rather keep it open in the event that you might use it and rack up interest charges. However, if enough time goes by without activity, the issuer actually loses money on your dormant account.So Mary is getting lower interest rate due to high usage and john is getting high interest rates.
If your credit card account goes through a long period of inactivity, your card issuer could close it without warning.
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