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For the second time in a row, the Federal Open Market Committee, or FOMC, kept the target for the federal funds rate at 2 percent. The prime rate, which moves with the federal funds rate, will stay at 5 percent.
Credit card interest rates should stay flat since many are tied to the prime rate, notes Scott Bilker, creator of DebtSmart.com, and author of “Talk Your Way Out of Credit Card Debt.” When the prime rate doesn’t move, variable credit card interest rates generally remain level.
In these troubled times, however, banks hurting from subprime losses are eager to scale back risk and increase profits wherever feasible.
“The majority of card issuers right now are constricting both acquisition of new cardholders … but they’re also constricting lines of credit to what they deem as more risky cardholders,” says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research.
In fact, a new report from Javelin Strategy & Research found that “more than 60 percent of credit card issuers are constricting lines of credit to existing cardholders.”
Consumer respondents in Javelin’s survey indicated they are reining in credit card usage. That forces card issuers to rely more on interest income rather than transaction revenue, Cundiff says.
Decreased spending combined with the fact that consumers reported a decreased ability to pay off existing balances on their credit cards forces issuers to deal with a big conundrum — they need to mitigate risk, but also must rely on interest income.
“What we could see as economic difficulties continue through the end of this year and on into 2009, is more consumers actually needing credit and needing to rely on credit as that safety net,” says Cundiff. At that point, he says, credit might not be available to them — not to new cardholders or to existing cardholders whose limits get reduced because of credit risk.
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