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Adobe Stock November 02, 2022 John Egan is a freelance writer and content marketing strategist in Austin, Texas. He is a contributor for Bankrate and specializes in content focusing on personal finance, real estate and health and wellness. Among the outlets where John’s work has appeared are CreditCards.com, Forbes Advisor, Experian and U.S. News & World Report. He is the former editor-in-chief of the Austin Business Journal. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Bankrate logo The Bankrate promise
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Some subprime cardholders may be spared any direct harm from the latest Fed interest hike, says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. For those cardholders, APRs might already be capped at the legal limit, he says. Maximum credit card APRs vary by state. “In those situations where rates have topped off at the legal limit, accounts shouldn’t experience any effect resulting from further Fed rate hikes,” says McClary. However, subprime cardholders with APRs below the legal limit might see their interest rates go up in the wake of the Fed’s action, he says. For instance, if a subprime consumer’s credit card charges a current 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 in the wake of the Fed’s move might be aggravated if the cardholder has recently or has . Both of those circumstances could lead to a card issuer raising your APR. The effect of these soaring interest charges on subprime consumers is likely much greater than it is for consumers with higher credit scores. “Recent reports have highlighted the vulnerable state of subprime borrowers in the current economic environment,” says McClary. “The higher likelihood of missed payments adds to the cost of repayment for those most likely to face a strong headwind of financial challenges.” Subprime borrowers are getting more cards and more credit
One of the reports mentioned by McClary was published in the Wall Street Journal. Citing data from the credit bureau Equifax, the newspaper that the share of subprime consumers at least 60 days’ behind on payments for traditional credit cards climbed from 9.8 percent in March 2021 to 11.1 percent in March 2022. An additional complication: More subprime customers are signing up for credit cards, boosting the amount of credit available to them and adding to their already fragile finances. Data from Equifax show that during the first three months of 2022, about 3.95 million traditional credit cards had been issued to consumers with a VantageScore 3.0 credit score below 620. Those credit cards are generally considered subprime accounts. The number of newly issued cards for subprime consumers jumped by 18.3% compared with the same period in 2021, according to Equifax. An even more startling number: Those new cards represent an overall credit limit of $3.29 billion. That’s up 42.7 percent from the same time in 2021, Equifax says. Landscape for subprime general-use credit cards March 2021 March 2022 Source: (page 31) 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 ray of hope is that the average FICO credit score for Americans has risen over the past couple of years to a record high,” McClary says. “That means it is possible that some subprime cardholders may have a new credit score qualifying them for more affordable interest rates.” According to FICO, the average credit score in the U.S. in 2022. A 716 score falls into . Is trouble ahead for subprime borrowers
Nonetheless, Bossler says, some subprime cardholders might be headed for trouble, given the current economic climate. In June, the U.S. inflation rate increased to 9.1 percent, . Inflation has cooled slightly since then, resting at 8.2 percent as of Oct. 13, according to the . “Many of the people we at GreenPath speak with are looking for ways to cope with inflation,” says Bossler. “The increased prices on everyday essentials from gas to groceries to utilities — and utilizing credit cards for these expenses — can lead to greater financial stress. We’ve seen a heavy need for budgeting and support services. Many of our clients are still facing reduced income and job loss.” GreenPath is noticing some troubling trends among subprime consumers and other borrowers, including: Using credit cards to supplement their income Making only the on credit card bills from month to month their credit cards Relying on How subprime borrowers can avoid danger
Unfortunately, options for subprime consumers to turn things around are limited, according to Bossler. While someone with a higher credit score might be able to take out a low-interest debt consolidation loan or , these solutions may be off-limits for subprime borrowers. Even if those options are out of reach for now, subprime borrowers can take these steps to stay out of — or get out of — a financial jam with credit card debt: due each month. “The longer you carry a balance, the more you pay in interest,” McClary says. Pay bills on time. represents 35 percent of your FICO score, making it the most important scoring factor. of your available credit. The amount of debt you owe makes up 30 percent of your FICO score. . Carrying a lot of debt, or carrying balances on credit cards for a long time, can weigh down your credit score. Regularly . A number of financial services companies offer both of these at no cost. if you fear you’re going to miss a payment. The company might be able to change your due date or make other payment arrangements. Contact a if you need help tackling your credit card debt. SHARE: John Egan is a freelance writer and content marketing strategist in Austin, Texas. He is a contributor for Bankrate and specializes in content focusing on personal finance, real estate and health and wellness. Among the outlets where John’s work has appeared are CreditCards.com, Forbes Advisor, Experian and U.S. News & World Report. He is the former editor-in-chief of the Austin Business Journal. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Related Articles