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Credit and Rates

Thursday, January 31, 2008

Economy is all about ups and downs. Now that financial experts all over the world are concerned about the potential economic recession in the US, the Federal Reserve took the lead and cut interest rate by three quarters of a percent, so that the federal funds rate is 3.5%. That's the most dramatic reduction since 1984.

What does this change mean for banks? It means that lenders will also lower their rates and this move will affect credit customers as well. The question is, who will actually benefit from this rate cut and when?

The fed funds rate plays a leading role, when it comes to lending, as banks lend one another funds at this very rate. The federal funds rate is also of great importance for setting the prime rate. To be more exact, banks add three percent to the fed funds rate in order to determine the rate at which they lend money to their most privileged clients.

It's worth mentioning that major US banks reacted at once by lowering their prime rates by 0.75% point. Bank of America, Wells Fargo, and Citibank have lowered their prime rates after the announcement of the Federal Reserve. And what about regular credit consumers?

Actually, credit cardholders can also benefit from this move, though not every Tom, Dick, or Harry. Meaning, only customers with good credit history will be able to make the most of this move.

By all means, if your credit card implies a variable APR, this change will serve your purpose. In this case, your APR is tied to some rate, as a rule it's the prime rate. So, your APR depends mostly on the rate changes. In the light of the recent changes, we must accept the fact that variable-rate cards are the most appropriate option.

As for the borrowers whose credit is far from ideal, the situation is a bit different. It's not news that lenders reserve credit cards with low interest rates for those with excellent credit.

And credit card companies have learned the lesson of the subprime mortgages, and lenders become even more scrupulous about their client' credit, not to mention the restrictions in credit card applications.

So, if you are in creditors' good books, it's high time to pay off your debts. Balance transfer credit card deals would be a wise step of yours if you decide to eliminate your debts. Lower interests are just what you need to pay off your debts as soon as possible.

As for those customers who have made late payments, creditors will hardly lower default rates significantly. Present days, lenders do their hardest to cope with ever-increasing credit card delinquencies, and late payment is one of those warning signs that lead to severe financial punishment.

Financial experts share the opinion that customers with strong credit is of great demand these days. It looks like people with excellent credit is the most wished-for clients for banking organizations. And these credit consumers will have the most generous credit card rewards and perks, as well as low rates and fees.