Another problem in borrowing from bank is the quantum of loan. Below a certain amount, lending becomes non-viable for banks. This is because there are establishment costs, employee costs, due diligence costs, etc., that the bank incurs. Some of these are distributed proportionately on loans, while others are loan specific. The total of such costs have to be recovered from the deal earnings. If the earning from the transaction is not likely to fetch returns that are enough to cover such costs, then the bank chooses to forego such lending even if the borrower is reliable and has a good credit score. This lost opportunity costs the investors quite a bit. Their funds remain idle till another borrower who qualifies in all respects is found. When profits earned on all transactions are averaged for the entire year, these zero profit periods bring them down. Therefore, resultant returns to the investors in the bank are lower because of these idle periods. In peer to peer lending such losses are minimal.

This is because Peer to Peer lending is much more personal. Here, the lender knows the borrower or a group of borrowers, as the case may be. In banks, lenders or investors are represented by the bank. Therefore, they do not know the borrower in person. Internet is one of the reasons for Peer to Peer Lending’s growing popularity. The other reason is the recessionary trend, and lack of liquidity all around. In this scenario, people may need monies for different reasons such as managing their debts, paying their bills, or clearing their credit card dues. Whatever be the reason, the lender is likely to judge them based on personal risk appetite and not a uniform risk appetite. The borrower is also at liberty not to disclose the reason for him or her needing that loan.

Internet has become a big facilitator of peer to peer lending. Both borrowers and lenders can use peer to peer lending sites. There are ample peer to peer lending sites. It is, however, not essential that all peer to peer lending businesses have same business models. Some sites facilitate direct lending, while others have indirect lending mechanism built in them. Direct lending implies the lender selects the person based on his or her requirements. Unlike banks, people from different locations across the world can access the monies or lend monies in peer to peer lending system. Of course, there is credit rating to go by. But the risk is almost entirely in the lender’s court. Lender may choose to distribute the risk over several borrowers whose credit rating is similar. Indirect lending is similar to the system in banks. Almost all costs in peer to peer lending are lower, partly due to Internet. Because of this, borrowers can get finance at a cheaper rate, and lender can still earn returns that are higher than what he or she would earn by investing the monies in bank.

What Determines Your Credit?

Your credit depends on a number of factors. Your credit score, also known as the FICO score is widely used as a credit rating for Americans. Since your credit rating will determine whether you are issued a 0% APR credit card, knowing what goes into the score helps a great deal. Your credit score is determined based on five parameters. The most important among these parameters is your current debt and your history of repayment of debt.

The other three parameters for calculation of credit score are the length of your credit history, amount of new credit and types of credit used. Based on these five parameters, the individual is given a score ranging from 300 to 850. This is indicative of the credit worthiness of the person at a particular point of time. People with credit scores above 770 usually qualify for a 0% APR credit card. However scores above 700 are also considered good. 0% APR credit cards typically require, at a minimum, very good credit and often will require excellent credit.

One method used by customers to avoid interest is balance transfer credit cards. It is possible to shift from a credit card that charges interest to a 0% APR credit card using a balance transfer, provided you have the requisite credit. Once the introductory period of the card expires, people often shift to other 0% APR credit cards using the balance transfer method. Doing this however harms your credit rating and can hurt your prospects of receiving good credit in the future.

Prudence Pays

It is good to be informed of clauses like the universal default clause. This clause states that if you default on your payments to one creditor, for example a bank, it affects your credit rating and can increase the rate of interest you are charged elsewhere. Responsible vendors realize that informed customers make for the best customers in the long run.

0% APR credit cards sometimes come topped with other offers. You can find a variety credit card offers online that come at 0% APR from the best companies. Choose the 0% APR card that makes the most sense financially and functionally. And always try to maintain you good credit rating that got you your 0% APR credit card in the first place.