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Today’s slightly easier credit may be just a mirage

Jeremy Simon

The U.S. economy’s problems could make it harder for you to get a credit card, according to one chief economist.

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If you recently applied for a new credit card, you may have found the bank was more likely to grant your request. And you weren’t the only one: A recent pair of reports from the Federal Reserve showed that consumers opened 10 million more credit card accounts in the second quarter of this year (April to June) as banks became more willing to approve borrowers for new credit.

But even if you’re celebrating now, don’t expect the party to last.

“The likelihood is that we do not get continued loosening” of card lending standards, says Nigel Gault, chief U.S. economist with IHS Global Insight. Blame the economy, Gault says. “Weak growth, with high odds of a recession, means higher unemployment, more consumer delinquencies and greater risks for banks. So banks are likely to be more cautious,” he says.

Earlier this month, those economic threats caused the Federal Reserve to take a bold step. In an announcement Aug. 9, the Fed said that it would leave interest rates at currently record low levels through mid-2013. The Fed typically keep its language unclear (for example, economic conditions are “likely to warrant exceptionally low levels for the federal funds rate for an extended period”) about when interest rates could eventually rise, preferring a wait-and-see approach. Not this time.

As the Fed keeps its controls on “pause,” credit card interest rates also may remain unchanged, Gault says. “With the prime rate stuck at 3.25 percent for the foreseeable future, that would mean no change in credit card APRs,” he says. The reason for that is the majority of cards have variable rate APRs based on the prime rate. The prime rate tracks the federal funds rate, which the Fed adjusts up and down — but currently plans to leave unchanged for at least two years.

But even those steady APRs could begin to rise if the economy worsens. “The problem would come if financial conditions tightened and the economy turned down — for example as a result of spillover effects from Europe, making it more expensive for banks to get funding,” Gault says. “In that scenario, banks would see a combination of higher funding costs and higher risks on their lending — more delinquencies and defaults — so they would demand a higher premium over the prime rate from consumers,” he says. In other words, if banks’ costs and risks increase, cardholders can expect to pay the price.

Just to keep things interesting, however, I’ll leave you on a (possible) up note. “The opposite would apply if financial markets settle down and the economy begins to grow faster. In that case, the premium over the prime rate might be reduced,” meaning lower credit card APRs, Gault says.

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