How Worsening Credit Conditions Affect Consumers

How Big is The Spread Between Credit Card Rates for People with Great Credit and Rates for People with Poor Credit?

The spread between credit card rates for people with great credit and poor credit can be pretty disparate. When credit conditions worsen, banks and financial institutions try to focus on lending to who they perceive as "safer" credit risks, due to this, spreads will tend to widen significantly. Individuals with poor credit who are applying for new credit (older lines of credit tend to be more seasoned and are less likely to have as wide a margin of difference) will likely pay a lot more for available credit than those with "great" credit. The spread can sometimes be as big as 20% (10% APR for great credit and 30% APR for poor credit)!

What Happens to This Spread When Credit Conditions Get Worse, and Why Does That Happen?

When the spread widens, this will lead to an increase in the cost of capital and the cost to borrow for those who often need it most. Consumers who make less money and have poorer credit will usually be the ones most negatively impacted by this. Consumers that carry credit card debt can also be severely impacted by an increase in interest rates. Interest rate increases lead to increased monthly payments, therefore increasing their monthly liability, possibly leading them towards financial hardship.

Which Consumers are Most Affected When Credit Conditions Worsen, and What Are Some of The Impacts on Them?

Individuals carrying variable rate debt are the ones who will be the most negatively impacted. This includes anyone who has an adjustable rate mortgage or has highly utilized credit card debt. The impact can be detrimental if someone is unaware of the impact rate increases will have to their budget and they are unprepared for it! If a consumer is just barely making ends meet and all of sudden their monthly expenses increase by $200 per month this can lead them to short term insolvency, cause financial hardship, deplete their savings, or even bankruptcy.

How Much Will a Fed Rate Cut Help People Struggling with Credit Card Debt?

Interest rates can tend to be quite sticky and the fed funds rates usually takes about 12 months to have a real impact on the economy. Moreover, interest rates go up a lot quicker than they go down. Due to this, a lowering of the Fed Funds Rate will not have the most pronounced effect on helping people struggling with credit card debt. Individuals with credit card debt more likely need a “quicker fix” to have a real impact to your daily lives. In times of a severe economic downturn this tends to be done via quicker acting fiscal policy like stimulus, etc.