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Some credit cards with low credit score and high APR

“Higher interest rates mean consumers pay more in interest, which means that the cost of using credit is higher. , who often have more balances than others,” says Katie Bossler, a quality assurance specialist at GreenPath Financial Wellness, a nonprofit credit counseling service. increase.

On December 14th, the Federal Reserve increased the Federal Fund Rate by her 0.50%. This is the seventh increase this year. As a result, those with credit cards that charge variable APRs (Annual Rates) may see these rates rise again. As of December 7, the average credit card interest rate hit a 2022 high of 19.40%, up from 18.45% just two months ago.

When the Fed raises interest rates, credit card issuers typically raise their APRs of their own. This means that cardholders may end up paying more interest to borrow money. This can be especially hard on cardholders with low credit scores (generally characterized as subprime customers). People with lower credit scores tend to be charged the highest APR.

Credit scores range from a minimum of 300 to a maximum of 850, with anything below 670 considered a bad credit score. The Consumer Financial Protection Bureau defines subprime credit scores as ranging from 580 to 619.

Good news and bad news for subprime borrowers

Some subprime cardholders may be spared direct damage from the recent Fed rate hike, says the National Credit Counseling Foundation. For those cardholders, APR may already have reached the legal limit, he said. Credit his APR limit on his card varies by state.

“In a situation where interest rates have hit the statutory cap, further rate hikes by the Federal Reserve will not affect the account,” he said, McClary. Watch their interest rates rise following the Federal Reserve's actions, he says. For example, if a subprime consumer's credit card currently charges his APR of 25%, but the legal limit is his 36%, the card issuer may see an opportunity to increase the rate. There is a nature.

For subprime cardholders, McClary said APR hikes could get worse following the Fed's latest move if cardholders have recently delayed payments or exceeded their credit limits. I am adding. In either situation, the card issuer could raise his APR. The impact of these soaring interest rates on subprime consumers could be much greater than on credit scorers.

“Recent reports highlight the vulnerable state of subprime borrowers in the current economic environment,” he says McClary. “Higher likelihood of defaulting on payments increases repayment costs for those most likely to face strong headwinds of financial hardship.”

Subprime borrowers are getting more cards and credit

One of the reports McClary mentioned was published in The Wall Street Journal. The newspaper, citing data from credit bureau Equifax, said the percentage of subprime consumers who were at least 60 days late on their traditional credit card payments increased from 9.8% in March 2021 to March 2022. reported that he rose to 11.1%.

And card debt is getting worse. The Federal Reserve Bank of New York reports a 15% year-over-year increase in card balances in the third quarter of 2022. This is his biggest increase in over 20 years.

More complicated: An increasing number of subprime customers are signing up for credit cards, increasing the amount of credit available and adding to their already fragile finances.

In the first three months of 2022, approximately 3.95 million traditional credit cards were issued to consumers with VantageScore 3.0 credit scores below 620, according to Equifax data. These credit cards are generally considered subprime accounts. The number of newly issued cards for subprime consumers jumped 18.3% over the same period in 2021, according to Equifax.

More amazing numbers: These new cards equate to an overall credit limit of $3.29 billion. That's a 42.7% increase from the same period in 2021, according to Equifax.

Subprime General Purpose Credit Card Status

March 2021 March 2022
Source: Q1 2022 Equifax data (31 pages)
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

“The only hope is The average FICO credit score for Americans has risen to record highs over the last few years,” McClary said. “This means that some subprime cardholders may have a new credit score that allows them to take advantage of more affordable interest rates.”

According to FICO, US The average credit score he hits a record high of 716 in 2022. The 716 score falls into the FICO “good” category.

Trouble Ahead for Subprime Borrowers?

Nevertheless, Bossler said, given the current economic climate, some subprime cardholders are in trouble. said it could be done. In June, US inflation rose to 9.1%, the highest since 1981, according to the US Bureau of Labor Statistics. Inflation has eased slightly since then, dropping to 7.1% in November, according to the U.S. Bureau of Labor Statistics.

“Many of the people I talk to at GreenPath are looking for ways to deal with inflation,” he says Bossler. “Rising prices for basic necessities, from gas to groceries to utilities, and the use of credit cards for these expenses can lead to greater financial stress. The need has been very high, and many of our clients are still facing income declines and unemployment.”

GreenPath has noticed several disturbing trends among subprime consumers and other borrowers, including:

  • Use credit cards to supplement your income
  • Minimize monthly credit card bills
  • Carry large balances each month
  • Using up your credit card
  • High-interest cash advances

How subprime borrowers can avoid danger

Unfortunately, subprime consumers are turning things around Bossler says there are limited options for Those with high credit scores may be able to take advantage of low-interest debt consolidation loans or balance his transfers, but these solutions may be off-limits to subprime borrowers. there is.

Even if these options are not currently within reach, subprime borrowers can take the following steps to avoid or avoid financial congestion due to credit card debt. increase.

  1. Pay at least the minimum amount every month. “The longer you hold the balance, the more interest you earn,” McClary says.
  2. Pay your bills on time. Payment history accounts for his 35% of his FICO score and is the most important score factor.
  3. Use less than his 30% of available credits. Debt accounts for his 30% of the FICO score.
  4. Reduce your credit card debt. Carrying large amounts of debt or carrying around credit card balances for long periods of time can damage your credit rating.
  5. Check your credit report and creditworthiness regularly. Many financial services companies offer both of these for free.
  6. Please contact your credit card issuer if your payment is likely to be delayed.
  7. If you need help dealing with credit card debt, contact a nonprofit credit counseling agency.