Last updated on November 4th, 2022 at 09:17 pm

The era of low-cost money is over. The credit crunch is here. It’s time to prepare for even higher interest rates. The FED is tightening the money supply which spells higher interest rates on credit cards and mortgages. 2022 is the first year of what may be a multi-year increase on mortgage and other interest rates.

Those of you who were around during the last financial meltdown in 2008-2009 may remember that something unusual happened. Not the meltdown, reduction in house values, or people losing their jobs but the way banks reacted to credit.

Many people that I know including myself within about two months found that our credit cards were either canceled or the amount of available recite was severely reduced. Someone with a $15k credit limit was cut back to $5k. According to U.S.News, this is a possibility. CNBC agrees as well.

Banks are taking proactive steps to protect assets

There were several factors at play. Banks took proactive action to prevent their customers from running up high credit balances without the income to repay them and second to clear out those cards that were not being used and thereby reducing their overall exposure to the financial debacle.

Some people if not many people look at the credit available on their cards like a fan back position should things get tight e.g. one family member loses a job. The cards are there to buy groceries. Even people who have paid off their cards and were not carrying a balanced look to the available credit as a lifeline.

Your credit card life line may be cut at any time

The purpose of this blog article is to inform you that your lifeline may be cut at any time. Do not rely on credit cards to get you through. This time the financial problems are far worse and some people even after only six weeks to two months after some businesses were closed are in trouble.

I recommend the following

This is what I recommend to reduce the potential of losing cards or having your credit lines reduced:

  • Use your cards. If you have not used a card for a while, buy some groceries or gas with it. Something you need and pay them off when you get the bill.
  • Try not to use more than 10% of the available credit on any one card or worst case 10% of all available credit. Some credit card credit checking sites indicate 30% which I believe to be too high particulary at this time.
  • Check your credit score through your credit card website.
  • Use the cards at least once each month until the Wuhan virus is over. Then put them back in the drawer and use them three or four times per year.
  • If you have a balance, try to reduce the balance by paying more than is requested on your bill for a while. If you have funds and pay them off, do so.
  • If you are short on funds but you can make the minimum payment, hold your money, uses the charge cards for necessities, and make minimum payments. Do not spend more than 50% of the total available credit on any one card. Yes, you will pay a little interest but it is more likely you will keep your card.

Never use cash when you can used a credit card

As a general rule of mine, never use cash when you can use a credit card. Earn those points and pay off the card at the end of the month. Switch cards periodically to keep them all current.

The suggestions above are from my personal experience and by no means should you go away thinking that taking the above actions will make you immune to a reduced available credit or that your card will not be canceled.

Perhaps this time the banks will not take this severe and drastic action but I would not count on it. Some have already taken action as indicated in the related articles I have included above. Best be prepared. Remember, do not overextend yourself.

Don’t use that card if you can’t pay it back

Never use your card for something if you know you can not afford to pay it back. You made a deal with the vendor that you would pay them what you owe. This social contract is critical to the functioning of a society.

At least one of the Fintech lenders (online lenders) has notified their investors that they are raising the minimum credit scores for clients who are borrowing from them. They stated that it is a direct reaction to the Covid-19 issue of more people asking for funding. In addition, they are verifying employment, something they only did occasionally.

Time to keep credit scores high

Minimum credit scores for buying and refinancing homes have are higher than they were in the past credit crunch. The price you pay for credit is usually directly connected to your credit score. If you take a lax attitude toward paying bills and have too much debt, you will continue to be penalized with even higher rates the next time you buy something.

Keep a watchful eye on financial news. The recent presidential election is already having an impact on energy prices. There is a ripple effect that will likely cause interest rates to rise on all types of credit. Remember, credit cards are variable which means if you carry a balance they can increase the interest rate.

Don’t forget to use your credit cards periodically to keep them and retain the current line of credit. You could consider setting up an auto-pay with a credit card for your mobile phone for example. At the same time set up an auto-pay from your bank account to the credit card. This way your mobile bill is charged each month at a fixed time and your credit card bill will be paid each month on time. Using your card in this manner keeps it active.

Moves by the government will affect you

This article was written a couple of years ago when all signs indicated a tightening in credit. Then COVID hit and everything changed. The FED allowed for more credit to flood the markets. Card issuers were sending enticing offers of zero interest on taking funds out of the card for a year or more. As of January 2022, this practice continues however, things are about to change.

Interest rates are up going up further and faster than any time in history, it’s a fact that has been recently announced. If you have variable credit cards, a HELOC, or any other variable interest rate, you are already affected. The first thing that happens is that rates will increase across the board. This may be followed by a tightening of credit and the issues described above will occur.

Act now to obtain a larger credit line for credit cards. Pay off your variable interest rate debt if you can. Refinance your home to eliminate the HELOC (second mortgage). If you are considering buying a home and can afford to do it now, you should move on to it.

Mortgage interest rates are affected

Mortgage interest rates have been held down on purpose. Unfortunately with all of that newly printed money floating around, the government must find a source of repayment. Until they can raise taxes, they must borrow. Your competition for mortgage loans is your government. It’s time to prepare for rising interest rates.

The 10-year treasury bond is usually the basis for fixed mortgages and that bond is directly affected by the loose money supply. The FED is trying to control inflation so they will tighten the money supply and that means the government will stop printing money and start borrowing more.

Unless another calamity befalls us, plan on those low mortgage interest rates as being a thing of the past.

No need to panic

Just prepare. Understand that credit will be tighter. If your HELOC is based upon the value of your house and the house value drops, you will be cut off from borrowing the remainder of the available funds. If you need the money now, take it. Property values are dropping although not at a rapid rate so pay attention to the market.

Interest rates will abate first then probably drop back to a lower rate. Credit card rates however due to the fraud and holders failure to pay has kept those rates very high and they are likely to remain high. Mortgage rates will be the first to recover.