Have you wondered why your credit card that had an interest rate of nine percent has jumped to 21% recently? Credit card rates are increasing which is making it more and more difficult for consumers to pay their bills without amassing huge amounts of interest.
Consumers everywhere are trying to keep their finances above water. This can be difficult when interest rates are on the rise and so is unemployment. When trying to downsize your debt, the last thing that you need is a change in your credit card interest rate.
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An Unstable Economy Leads to Securitization
It is no secret; the economy seems to be in a downward spiral. Households are tightening their budgets as credit card companies increase their interest rates creating a dangerous cycle of creating debt in order to pay off that same credit card debt.
Securitization means that when the issuing credit card company sells off the credit card debt to investors, they also sell some of the risk that goes along with the debt. The investors (or buyers) of that debt need to recoup their profits while trying to decrease the risk. This is in the form of higher interest rates that are passed on to the consumers.
Legislation Responds to Credit Card Fees That Increase Interest Rates
Banks used to charge consumers a fee for swiping their cards more than the allowed amount per month. In order to counteract this bit of legislation, card issuers decided to reallocate those fees by transferring them to interest rates. The consumer is either going to pay card fees or a higher interest rate. Since charging consumers to swipe their cards was limited, interest rates increase.
The Higher the Risk, the Higher the Interest Rate Will Be
When you apply for a credit card, the issuing bank performs a credit check. This entails searching your credit history to determine the amount of risk that the company is taking by extending credit to you.
If your payment history is satisfactory, then the interest rate will be less than someone who has a history of late payments or going over their credit limit.
Credit card delinquency has been on the rise since the beginning of the recession. Consumers who miss payments, have late payments, or simply do not make their payments at all are causing credit card companies to become increasingly diligent in their process of extending credit. It is necessary to have a much higher credit score in order to maintain a lower interest rate.
You Can Opt Out of Credit Card Interest Increases
The Credit Card Act of 2009 has made some severe restrictions on credit card companies. They are mandated by law that they must inform their customers of any impending changes to their accounts. Customers must be provided at least 45 days notice of any changes that will affect their accounts.
If your credit card issuer decides to increase your interest rate, you have the option of “opting out” which means you can say no to the increase. However, the issuer will then close your account. You will continue to pay on your remaining balance at your current interest rate until is it paid in full.
Once you opt out of the rate increase and your account is closed, you will no longer be able to make any purchases, cash advances, or balance transfers with that credit card.
Credit Cards Offer More Risk and Less Collateral
Mortgages and bank loans have lower interest rates than credit cards because they are tied to physical forms of collateral. This translates to less risk. According to SmartMoney, the high unemployment rate in the U.S. feeds into the risk of a consumer missing payments or losing their jobs.
Credit Scores Play a Big Part in Determining Interest Rates
Suze Orman gives an in-depth breakdown of how credit scores are used to determine interest rates. According to Orman, consumers with a score of less than 720 will receive higher rates while those who have 760 or higher will have significantly lower rates.
Interest Rates have Decreased Slightly in 2011
Not all credit cards have increased their rates; some have actually been lowered slightly.
The average rate in the fourth quarter of 2011 was 12%, which was a point lower than the previous quarter of 13%. However, interest rates on credit cards are still the highest compared to mortgages and auto loans.
Use the FREE credit card finder to search for credit cards today!
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