The use of credit cards can be very expensive. One of the most significant costs is the interest charged on unpaid balances. Most credit card interest rates are variable, meaning that the lender can change the rates during the life of the loan. Rates are more likely to increase than decrease. The following are some of the reasons that lenders raise rates.
Late Credit Card Payments
All credit card accounts require a monthly payment. Part of the payment is used to pay down the balance, and the remainder is used to pay interest on the balance. Lenders typically require a low minimum payment. They want you to extend the repayment period as long as possible so that they can make more money in interest on your account. If you are late making a payment, even one day late, the lender will require a hefty late-payment fee and increase the interest rate on your account. If you chronically pay late, the lender may cancel your account and demand payment in full. If you do not pay the balance, they will send your account to a collection agency which will severely damage your credit rating.
High Balances on Your Credit Card
Borrowers who maintain high balances are less likely to repay their debt. Therefore, high credit card balances result in high interest rates. To keep your interest rate low, try to maintain a balance under 10% of your credit limit and make your payments on time. Timely payments and low balances can raise your credit score.
Your Credit Score
Credit scores and interest rates have an inverse relationship. As Credit Scores go down, interest rates charged by lenders go up. If you have a history of making late payments and/or maintaining a high balance on one credit account, it can decrease your Credit Score and increase the rate you will receive from another lender. With a low Credit Score, banks will be reluctant to lend you money. If they do, they will charge you significantly more in the form of higher interest rates.
Prime Credit Card Rate Changes
The Federal Reserve sets the national prime interest rate. This is the rate that lenders charge other lenders. Banks set their commercial and personal lending interest rates higher than the prime rate so that they can earn money on their lending services. If the prime rate goes up, your credit card interest rate will go up too.
When the economy is in a recession, the credit market tightens - fewer loans are distributed and higher interest rates are charged. In a tight credit market, borrowers with low credit scores will pay more in interest than borrowers with high credit scores. A high credit score can provide some immunity to changes in the market.
If you have unmanageable credit card debt, contact us to see how we may be able to help.