How Interest Rates Affect Your Credit Card Debt
In a previous post on this here blog, we wrote about the problem we see with borrowers needing to reduce their debt before they can be approved for a car loan. Today, we want to take an in-depth look at how credit card debt (a big offender when it comes to Americans' outstanding overall debt) is affected by the interest rate on each card you carry.
Factors Included In Credit Card Interest Rates
One of the first things you need to take into consideration before applying for a credit card, is the interest rate you'll be charged after the preliminary promotional period (aka, credit card honeymoon) kicks in. For many people struggling with credit issues, credit card companies will only offer you cards with high interest rates. The higher rates are justified by the higher risk that a bank incurs when they take on people with bad credit, but they can be brutally high, so if you're considering applying for a credit card with bad credit, only do so if it's absolutely necessary. In the long term, it's better to wait until you can curb your current debt, in order to make your credit card application more attractive to lenders.
Aside from bad credit, other factors that can impact your credit card interest rate include paying your credit card bill 60 or more days late, a further drop to your credit score (credit card companies routinely review their current cardholder's creditworthiness--if your file is pulled after a drop to your score, you may see a spike in an already-high rate), or the aforementioned end of a promotional period (don't get suckered in by 0% interest offers, and know when the promotional period is ending in order to save yourself the shock of steep interest rate hikes).
The CARD Act of 2009
As popular credit site NerdWallet has note, the CARD Act of 2009 did a lot to protect cosumers from arbitrary interest rate hikes--but there are still lots of ways to be on the short end of an unexpected interest rate jump. Probably the biggest factor that most consumers forget to take into consideration is that almost every credit card is subject to a "Prime Rate" that's set by the Federal Reserve. If the Federal Reserve increases the prime rate, then your interest rate will go up.
Being credit card savvy will not only help you curtail your current debt, but it will help you plan for future expenses, and set you on the path to healthy financial living.
Got a pro-tip for using credit cards? Sound off in the comments section!