Subprime Credit Cardholders Hit Hardest by Rising Interest Rates – | Vette Leader

Some credit cardholders with low credit scores and high APRs may find themselves in a deeper financial hole due to the Federal Reserve’s recent rate hike.

“Higher interest rates mean that the cost of using credit is more expensive as consumers pay more interest — impacting those with subprime loans, who often have more in the bank than others,” says Katie Bossler, quality assurance specialist at GreenPath Financial Wellness. a nonprofit credit counseling service.

On July 27, the Federal Reserve raised the federal funds rate by another 0.75 percent, the fourth rate hike this year. As a result, people with credit cards that charge variable annual percentage rates (APR) might see those rates go up again. On July 20, the average interest rate on an adjustable-rate credit card was at a 2022 high of 17.25 percent, up from 16.4 percent just three months earlier.

When the Fed raises interest rates, credit card issuers typically follow suit with their own APR hikes. That, in turn, means cardholders may pay even more interest to borrow money. This could hit cardholders with low credit ratings — commonly referred to as subprime customers — particularly hard. Those with low credit ratings are typically charged the highest APRs.

Credit scores range from a low of 300 to a high of 850, with anything below 670 considered a bad credit score. The Consumer Financial Protection Bureau defines a subprime credit score between 580 and 619.

Good and bad news for subprime borrowers

Some subprime cardholders could be spared direct damage from the Fed’s recent rate hike, says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. For those cardholders, APRs may already be capped at the legal limit, he says. Maximum APRs for credit cards vary by state.

“In those situations where interest rates have reached the legal limit, the accounts should not experience the impact of further Fed rate hikes,” McClary says.

However, subprime cardholders with APRs below the legal limit may see their interest rates rise as the Fed moves, he says. For example, if a subprime consumer’s credit card charges an APR of 25 percent, but the legal cap is 36 percent, a card issuer might now see an opportunity to raise the rate.

McClary adds that for a subprime cardholder, an APR hike after the Fed’s move could be exacerbated if the cardholder recently made late payments or hit their credit limit. Either circumstance could result in a card issuer raising your APR.

Fed rate hikes have already increased the cost of existing credit card debt by $8.1 billion this year, according to a study by WalletHub, and the July 27 rate hike could add another $4.8 billion this year. Dollar trigger to $6.4 billion. It is likely that the effect of these rising interest rate charges on subprime consumers has been unbalanced relative to consumers with higher credit scores.

“Recent reports have highlighted the vulnerability of subprime borrowers in the current economic environment,” McClary said. “The higher likelihood of missed payments increases the cost of repayment for those most likely to face severe headwinds from financial challenges.”

Subprime borrowers get more cards and more credit

One of the reports McClary mentioned was recently published by the Wall Street Journal. Citing data from credit bureau Equifax, the newspaper reported that the proportion of subprime consumers at least 60 days late on traditional credit card payments rose from 9.8 percent in March 2021 to 11.1 percent in March 2022 .

An added complication: more and more subprime customers are signing up for credit cards, increasing the amount of credit available to them and adding to their already fragile finances.

Data from Equifax shows that in the first three months of 2022, approximately 3.95 million traditional credit cards were issued to consumers with a VantageScore 3.0 credit score of less than 620. These credit cards are generally considered subprime accounts. According to Equifax, the number of new cards issued to subprime consumers increased by 18.3% compared to the same period in 2021.

Even more amazing number, these new cards represent a total credit limit of $3.29 billion. That’s 42.7 percent more than at the same time in 2021, says Equifax.

Landscape for general purpose subprime credit cards

cards issued 3.38 million 3.95 million
total credit limit $2.37 billion $3.29 billion
Share of all newly issued cards 21.2% 23%
Average credit limit $681 $865

“One glimmer of hope is that the average FICO credit score for Americans has risen to an all-time high in recent years,” McClary says. “That means some subprime cardholders may have a new credit rating that qualifies them for cheaper interest rates.”

Credit bureau Experian reported in February that the average FICO credit score in the US rose to a record high of 714 in 2021. A score of 714 falls into the FICO category of good.

Are subprime borrowers in trouble?

Nonetheless, Bossler says some subprime cardholders may be heading for trouble given the current economic climate. In June, the US inflation rate rose to 9.1 percent, the highest level since 1981.

“A lot of the people we talk to at GreenPath are looking for ways to deal with inflation,” says Bossler. “The increased prices of everyday necessities, from gas to groceries to utilities – and the use of credit cards for these expenses – can lead to greater financial strains. We have identified a great need for budgeting and support services. Many of our customers are still facing lost income and jobs.”

GreenPath notes some worrying trends among subprime consumers and other borrowers, including:

How subprime borrowers can avoid danger

Unfortunately, according to Bossler, the opportunities for subprime consumers to turn things around are limited. While someone with a higher credit rating might be able to get a low-interest debt consolidation loan or a balance transfer, these solutions might be off-limits for subprime borrowers.

While these options may be out of reach for now, subprime borrowers can take these steps to stay out of – or get out of – a financial squeeze with credit card debt:

  1. Pay at least the minimum amount due each month. “The longer you have a balance, the more interest you pay,” says McClary.
  2. Pay bills on time. Payment history accounts for 35 percent of your FICO score, making it the most important assessment factor.
  3. Use less than 30 percent of your available balance. The amount of debt you owe makes up 30 percent of your FICO score.
  4. Reduce credit card debt. Carrying on a lot of debt or carrying balances on credit cards for a long time can take a toll on your credit score.
  5. Check your credit reports and credit scores regularly. A number of financial services companies offer both for free.
  6. Contact your credit card issuer if you’re concerned about missing a payment. The Company may change your due date or make different payment arrangements.

Contact a nonprofit credit counseling center if you need help managing your credit card debt.

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