The Federal Reserve has reported that it anticipates raises in the Federal Reserve prime rates for 2017. This raise in rates may have a massive “trickle down” effect that will alter many current financial norms. Among these “norms,” credit card interest rates may soon be increasing.
Credit card interest rates are usually set to a variable or adjustable rates according to the terms of the credit card contract. This essentially means that credit cards rarely have “hard terms” when it comes to minimum payments or charged interest. When the Federal Reserve changes the prime rate, the entire financial industry makes massive changes to adapt to these increases. Many mortgages, investment loans, and smaller loans like credit cards will instantly become much more difficult to repay or even service monthly.
Essentially, the moment that interest rates increase on credit cards via prime rate increases, everything becomes much more expensive. All the items purchased through the credit card and the continuation of the credit card services greatly increase in price. Because the total cost of servicing the credit cards increases, this increase can sometimes break an already tight budget. Once a credit card payment is missed or late, many times the interest rate then increases exponentially. Interest rates as high as 24% in such situations are not uncommon. This can equate to charging up to four times the original amount or greater for the good or service that was purchased through the credit card.
Because credit card defaults are very difficult from which to recover, bankruptcy frequently follows. An already stretched budget cannot accommodate such large required monthly payments. In fact, the increase in interest rates cause defaults across the entire financial spectrum. Credit cards are not the only avenue to bankruptcy during a Federal Reserve rate increase.
Because of the nature of our financial systems, eventually the Federal Reserve Bank rate must increase. The United States currently operates on an excessively over-leveraged, debt laden financial system. As a nation, we may only be living on borrowed time. Massive changes to our nation’s financial and debt systems will likely be required to put things back on track. If you are in need of a personal financial overhaul, do not take it personally. The entire national financial system is right there with you. If you need to talk to somebody about debt relief or possibly about bankruptcy, do not hesitate to give our office a call.