How a Recession Can Affect Credit Card Interest Rates

Credit card interest rates respond to both your personal finances and the national credit markets. It is easy to think you are immune from national credit swings if you have good credit. It is true: those with bad credit are more affected by the national markets. However, even those people with excellent credit & financial health will see changes in their credit card interest rates during a recession.

Increase of Defaults & Bankruptcies

During a recession, there is a high incidence of default and bankruptcy across the country. As people lose their jobs, businesses go under and salaries are reduced, a lot of banks will have bad loans on their records. This means both banks and credit card companies will be suffering from lost income. In some extreme cases, the banks and companies themselves will go under. Whenever there are defaults on existing debt, the debt load the bank still carries is subject to higher interest rates. Your rates may adjust higher. In the recession of 2007-2009, rates went up as much as 10% on some credit cards.  

Less Liquidity 

Less banks lend money during times of a recession. This not only affects consumers such as you, it also affects the banks. They are less able to borrow money from each other and from the Federal Reserve when liquidity is low. As banks and lenders cannot borrow as much money and do not have as much money in house, they have less to provide for consumers. Limits may adjust lower for some people who carry current credit cards. Requests for limit increases will often be denied, especially to those with poor credit. Credit cards may be cancelled in extreme situations for those people with the lowest credit scores. 

Decrease in National Interest Rates

The Federal Reserve often lowers interest rates in a recession. They do this in order to curb inflation and stimulate borrowing and spending. If you have an adjustable rate card, your interest rates may be partially controlled by the national interest rate. For example, your contract may have stipulated your rate could never go over a certain percent higher than the national rate. Your rates may come down as a result. Most consumers will still see an increase in credit card interest rates in a bad economy, however.

New Legislation & Stimulus

The government will often institute programs and policies in a recession to encourage lending and protect borrowers. In 2009, one of the most significant changes to national credit card policy made increasing interest rates on existing debt illegal due to the recession. Other measures slowed foreclosure proceedings and offered support for those in a high amount of debt. These types of programs will affect credit card interest rates depending on the government's response to the immediate economic situations. If the recession is mild, the response will likely also be mild. In extreme cases, the government's actions will also be extreme. Researching government policies regarding credit lines is wise in order to ensure you are receiving the full benefits of any government program.

 


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