How the Fiscal Cliff Could Affect Your Credit Card

How the Fiscal Cliff Could Affect Your Credit Card

The fiscal cliff is getting closer to becoming a reality. The members of Congress and President Obama still seem far apart. Statistics and projections show the painful consequences with tax increases for many consumers. Higher tax payments will be bad news for household budgets that are already stretched to the limit.

Here is how your credit card account could be affected if a deal is not reached:

Increase in Credit Card Debt

Higher tax payments mean less money will be available to consumers to pay down their personal debt. It may also force some households to turn to credit cards to pay for the essentials, running up their credit card balances.

It could push some American families off their own cliffs of debt.

This comes at a time when credit card debt is increasing. The average credit card debt per American borrower increased to $4,996, up 4.9 percent in the third quarter from year-ago levels, according to a report released by TransUnion. The same report showed delinquencies in credit card accounts are also on the rise. Late payments at least 90 days overdue slightly increased to 0.75 percent during the July-September period, up from 0.71 percent in the third quarter of 2011. The late payment rate was 0.63 percent in the second quarter of 2012.

Tightened Lending

Some economists predict that falling off the fiscal cliff could also mean the economy plunges back into a recession.

It has taken over three years for banks to slightly loosen lending standards for credit cards. If this creates another recession, we can expect issuers to tighten their standards for approval, cut the credit limits on existing accounts, and approve lower limits on new accounts. If consumers stop spending, banks lose money. This may lead to an increase in interest rates and fees as banks try to make up for lost revenue.

Higher Interest Rates

Credit rating agencies warn that failure to reach a bipartisan agreement could endanger the nation's credit rating. The three national credit rating agencies--Fitch, Standard and Poor's (S&P), and Moody's Investors Service--measure the creditworthiness of companies and governments. The higher the rating, the less risky the investment, and the more likely the bank or government will repay the loan. Credit downgrades are similar to a drop in credit scores, and indicate a higher risk of default on loans. This can lead to higher interest rates for banks and the government.

Banks depend on getting low interest rates so they can make profits on the loans they make. If banks pay higher interest rates, this will squeeze profits that have already been sliced by regulations and changes in the industry. Increasing interest rates for government and bank loans could lead to increases in all interest rates, including credit cards, mortgages and student loans.

Cutbacks of Introductory Offers

When the latest economic downturn took place, issuers were very quick to cut back on the attractive introductory offers on credit cards. Prior to that downturn, many issuers tried to lure new customers by offering 0 percent APR on balance transfers and purchases for 12 to 18 months. But when the economy turned sour and banks started to lose money, most issuers slashed those introductory offers.

Introductory offers are again plentiful in the credit card industry in 2012. But if an agreement is not reached and banks start to see their profits decrease, it would not be a surprise to see the attractive introductory offers greatly decreased once again.

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