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How Inflation Affects Credit Card Users
While the prospect of higher inflation can be daunting for most consumers, there are both positive effects for credit card users.
- Increased Rates: The most obvious effect inflation has on credit card users is interest rate increases. Interest rates are used by the FED to try to manage inflation, so when inflation is on the rise, interest rates tend to follow suit. Since most credit cards have a variable rate, credit card users can expect to see their card rates increasing.
- Smaller Likelihood of Credit Increases: As the inflation managing measures kick in, there is less cash flow in the economy. This means that your credit card issuer may be less likely to give you a credit limit increase on your card.
- Shorter Promo Periods: Many credit cards offer a 0% introductory rate, but as financial times become tougher, credit card companies are likely to restrict these promo periods. So, while you may be able to get a card with up to 18 months at 0% during times of low inflation, during high inflation, you may struggle to find cards offering far less than this.
- Greater Value for 0% Promos: If you already have a card and you’re still in the 0% promo period, you’ll enjoy greater value from this card bonus. You can spread the cost of charges across your promotional period, which allows you to get a better grip on your finances as the increased cost of living takes effect.
- Take Advantage of Big Ticket Sales: For many consumers purchasing big ticket items will require some form of financing. However, when inflation rates are high, obtaining credit can be more difficult. If you have a credit card, you can still purchase a big ticket item without needing to qualify for finance.
How Inflation Affects Credit Card Issuers?
While it is easy to assume that credit card companies have the financial market sewn up and always profit, inflation can also affect them in positive and negative ways.
- Higher Margins: The most obvious benefit of higher inflation is that credit card issuers can enjoy higher margins. When the base interest rate goes up, credit card issuers can legitimately increase their rates without becoming uncompetitive. This means that they can enjoy higher profit margins.
- Greater Customer Loyalty: The credit card market can be highly competitive, but when it is harder to obtain credit, customers are less likely to want to swap to a new credit card. This means that they are more likely to stick with their existing card even after any promotional rates or deals hav ended.
- Increased Defaults: On the negative side, credit card issuers are more likely to deal with default issues when financial times are tough. When consumers are struggling to cope with the increasing prices of essentials such as gas, food and energy, they may neglect meeting their debt responsibilities. This means that the credit card company may need to spend more resources chasing payments, and issuing default notices.
- More Write Offs: This follows on from the previous point, but when consumers are struggling financially, credit card companies often find it more beneficial to offer settlement terms. They may also need to write off more debt due to a greater number of bankruptcies. So, while the credit card issuer may be making more on the higher margins, they will also need to write off more.
Which Type of Card is Recommended Now?
Although the financial landscape has changed with the higher rates of inflation, which type of card is best for you will still depend on your financial circumstances and requirements.
1. Balance Transfer Cards
If you’re carrying credit card debt, the recommended card for you would be a balance transfer card. This will provide you with a low interest rate or an introductory period with 0% which will allow you to pay down the card balance with the minimum amount of interest.
If you are not paying a high rate of interest on your balance, more of your monthly payment will be going towards reducing the outstanding balance.
2. Rewards & Cash Back Cards
If you tend to be good at paying off your balance in full and don’t tend to carry credit card debt, a rewards card is likely the best choice of card for you. With increased spending on essentials such as food and gas, you can earn reward points to earn more cash back.
Of course, you’ll need to consider your choice of rewards card to ensure that it matches your typical spending habits. There is no point in getting a card that offers the highest rewards in categories where you don’t typically spend. You should also look for a rewards card that offers your preferred redemption methods.
If you want to earn cash back on your purchases to bring down the real cost of your everyday spending, you’ll want a card that offers statement credit or direct bank transfer of your rewards rather than needing to spend them in the card travel portal.
3. Travel Cards
If you still tend to travel frequently, a travel card is likely to be your best bet. While the cost of travel is starting to go back to pre pandemic levels, a travel credit card can allow you to accumulate rewards to offset these increasing fares.
Additionally, many travel credit cards have a travel portal that allows you to search for great deals on fares and accommodation exclusively available to the credit card brand.
4. Student Cards
If you are in full time education, you may still want to consider a student credit card. Credit card issuers are still offering some great incentives for students with their student credit cards.
This can include rewards on your typical spending, travel perks and other benefits that can help you bring down the costs of your studies and enhance your college experience.
Credit Cards Benefits & Risks When Inflation Is High
If you make a charge with your card, the payment may not be due for up to one month.
This means that it is possible to save one month's interest on larger purchases or not pay any interest at all if you can clear the charge by the due date.
During times of high inflation, the cost of living can significantly increase. If you have a strict weekly budget, you may not be able to take advantage of multiple purchase offers when you are grocery shopping that would bring down your monthly food expenses.
However, a credit card allows you to spend more in the week with lots of offers, as you can pay off the total grocery bill at the end of the month.
While no one enjoys paying more for gas and groceries, if you’re getting points for every dollar you spend, you will accumulate rewards more quickly when inflation is high.
Since most people need some form of finance to purchase big ticket items, having a credit card offers the benefit of being able to make your purchase without worrying about qualifying for in store credit.
The most obvious risk of credit cards when inflation is high is that any balance that you carry on your card will attract more interest.
Most credit card issuers will increase the variable rate when the base rate goes up, so more of your minimum payment will be spent covering the interest, so it will take longer to clear your debt.
Credit utilization or the amount of debt as a percentage of your available credit limits is an important part of calculating your credit score.
When economic times are tough, potential lenders will pay particular attention to your credit utilization ratio. Since your credit card issuer will be less likely to give you a limit increase, you need to watch you’re not carrying a balance that compromises your ratio.
While your card issuer cannot change the terms of an existing promotional offer, you are likely to find that there are fewer attractive promotions on the market.
So, if you were hoping for a long 0% introductory rate to help you clear your balance, you may be out of luck.
If you do start to experience some financial issues, you may find that there is less leeway with your credit card issuer compared to low inflation periods.
Since more people are likely to default, your credit card issuer may be less willing to forgive a late payment or other issues, so you may struggle to get fees waived.
Things to Watch Out
Although high inflation can complicate many aspects of your finances, when it comes to choosing a new card, the things to watch out for remain pretty much the same. These include:
- Look Out For Fees and Charges: Before you sign up for a card, make sure that you understand all the potential fees and charges that may be applied to your account. While you may be confident that you will never make a late payment, you don’t want to get stung with a massive fee if there is a mix up at the bank.
- Make Sure Rewards Match Your Spending Patterns: If you’re opting for a rewards credit card, you should not need to change your typical spending patterns to be able to earn the most rewards. While you may aspire to travel the world, if most of your spending each month is on groceries, gas and dining out, your reward card should prioritize these categories with the highest rewards.
- Can You Meet the Bonus Criteria: If your new credit card offers an introductory bonus of extra points, miles or cash back, make sure that you can comfortably meet the spending requirement within the introductory period. While a massive bonus is great, if you would struggle to meet the spend requirements, you are better with a more modest bonus.
- Are the Perks Worth It? If you’re paying a higher annual fee to get a long list of perks, you need to assess whether these additional card benefits are of value to you. There is no point in having a card with a hefty annual fee if you will never use the rental car insurance, lounge access and other perks. If you don’t use these benefits, you could be paying a higher annual fee for nothing.
How Does Inflation Affect Credit Card Debt?
The main way that inflation affects debt is in its relationship to interest rates. When inflation is rising, interest rates tend to follow suit. This means that you could end up paying more interest on any credit card debt.
If you’ve budgeted to pay $100 a month on your credit card bill and the interest rate goes up, more of this payment will be covering the interest, so you’ll have less to reduce the card balance. So, you’ll either need to increase your payment or resign yourself to taking longer to clear the debt.
Is Credit Card Debt Better Than a Personal Loan?
This depends entirely on your circumstances. If you have a credit card balance on a card that has 0% for the next 12 months, you could have a full year to clear the debt and not incur any interest charges.
However, if you have a card with a high interest rate and it will take you a significant period to clear the debt, a personal loan could provide a better solution. This will allow you to access a lower interest rate, with a set payment schedule, so you’ll know exactly how long it will take to pay off the debt.
Is it Harder to Get a Credit Card These Days?
When inflation is high and the economy is bracing for a recession, lenders do tend to be more reluctant to approve applications.
So, unless you have perfect credit you may find it more challenging to get a credit card now compared to a few years ago. However, there are still lenders on the market, who have products designed for those with less than perfect credit. Just be sure to check the rate and terms before you submit your application.
Should I switch to balance transfer card?
If you have a balance on a credit card with a high interest rate, you could think about transferring it, but you should carefuly analyze your options first.
You might significantly reduce your interest payments if you have strong credit and are confident that you can be approve for a card with a promotional rate or a reduced rate. Transferring to a card that rewards you for transferring a sizable sum during the initial period can also be a smart move.
However, you might find it difficult to get a card with a higher rate if your credit is less than ideal. You might need to consider a consolidation loan because it might provide a reduced rate. You must be careful not to choose a lengthier loan period, since this would raise the total cost of the debt.
Are interest rates on credit cards fixed?
Usually, no. Credit card rates are updated regulary by the issuers and has a string correlation with the prime rates. As long as the prime rates increase, your credit card rate will probably increase as well.
It's not relevant for credit card having fixed a rate (usually 0%) for at least a predetermined time,.
Why is the interest on my credit card so high?
The interest rates on credit cards are often determined by your risk profile. Your rate will be determined by the credit card company once it evaluates your credit score. You probably have a credit score that is below ideal if you have a high credit card interest rate.
This does not, however, imply that you have a low credit score. Due to the great perks they offer, certain credit cards are made specifically for those with excellent credit.
Therefore, even if you have a really good score, it could not be as high as you would like, and this will show in the rate you receive.
If you violate the card's terms and conditions, your credit card rate may also rise. If you have skipped payments or made late payments on your account, some card issuers charge you an interest rate penalty.
Can I completely avoid paying interest?
Yes, it is possible to use your credit cards without incurring interest. You won't have to pay interest on your account if you pay off the entire sum on your card each month. Between the conclusion of the billing cycle and the day on which your card payment is due, card issuers grant a grace period. Normally, this takes 15 to 21 days. You won't be charged interest if you pay off your card balance before the grace period expires.
Joining a card with an introductory rate of 0% is another strategy to avoid paying interest. Many credit card companies offer 0% interest for the first 6, 12, or even 18 months. Because of this, you will be able to pay down the card balance each month without having to pay any interest fees.