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[05/15/2008]
The Fed Is Trying to Save the Credit Card Market
The Federal Reserve is all hopes and dreams of the U.S. credit card companies and banks. It is the Fed that can breathe life into the U.S. credit card market that is in the doldrums at the moment. And the Fed does not remain indifferent to the U.S. credit card industry problems. The Fed is trying to ease the situation.
On May, 2 the Federal Reserve announced about their resolution to increase the size of credit they can issue to banks, in addition to that, the Fed made a decision to allow banks use not only mortgages, but also credit card debt, car and student loans as collateral loans.
The Fed took measures to solve the liquidity problem on the U.S. and European credit card markets. Now that credit companies can use other type of loans besides mortgages as collateral loans, the liquidity risk for the Federal Reserve had dropped.
The Fed Funds has recently reduced the Target rate to 2%. This resulted in the prime rate reduction to 5%. However, credit card holders did not get a significant interest relief.
The thing is that most credit card companies switched the variable rates (that change together with the Fed prime rate) on the credit card they issued to their clients into a fixed rate (the rate set by a creditor, it is not tied to the prime rate set by the Fed). So, credit consumers now pay off the money borrowed at the credit card interest rates set by the issuer.
The reasons for the Fed's actions are quite clear. They are trying to secure their funds. For if the banks are unable to pay back the money borrowed from the Federal Reserve, the U.S. economics can face a banking system crisis.
But it is not just the Fed funds that they are trying to protect. The Federal Reserve attempts to solve the problem of tight credit market. And here is the way out that the Fed has come up with.
Lending facilities is what will help to ease the tension on the U.S. credit card market. The Term Securities Lending Facility, the program developed to expand the types of collateral used by banks in order to back up the Federal Reserve loans. The program stipulates new eligible types of collateral (student loans, car loans, credit card debts).
Besides, the Fed is determined to lend up to $200 billion to 20 banks. Under the Term Auction Facility, the size of credit the Fed is to give the banks amounts to $75 billion per auction. As compared to the previous $50 billion, it is a significant increase. These two programs were approved by the Federal Open Market Committee.
So, this way the Federal Reserve's new measures help to feed the wolves and keep the sheep untouched. The solution is expected to ease the liquidity pressure, which gives more guarantees that the Federal Reserve funds will be paid back. And the banks will be able to get larger credits and recover from the credit losses.
Active credit card use is a sign of a society with well-developed market relationships. More and more people get involved in buying goods and services with plastics. Using virtual funds to make real purchases is very convenient. But this extended buying power has led Americans to a dangerous trend. Over 40% of American households, according to the USA Federal Reserve statistics, spend more money than they make.
In the average, every American of these 40% spends $1.2 per every $1 he or she earns. Plastics have changed people's spending habits. These plastic devices allow and encourage people to spend more and more money. Around 18% of all purchases made by Americans involve credit card use. About 24% of the purchases are made with other types of plastics.
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If you are determined to eliminate your credit card debts and you have good credit, getting a balance transfer card is a good idea. You can shift your credit card balances with high interest rate to a card with much lower rate or 0% APR at all. But there is one thing that can reduce your profit from this kind of a deal. It is balance transfer fee.
Most balance transfer cards come with a fee for a transfer. Not long ago you could easily find a plastic for balance transfers with no fee. However, due to the credit card market crisis and economy slowdown, lenders have pulled these deals from the market. And now it is rather hard for a customer to find a balance transfer card that comes with no fee. But there are some ways to negotiate a better balance transfer deal.
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These days you can buy nearly everything using a credit card or a loan. When it comes to some everyday needs or comparatively large purchases, like a TV set, a microwave own, or a dishwasher, a credit card suits perfectly. But when you make up your mind to buy a car or a house, you will need to take a specific loan.
Most people believe that a car loan is easy to get. However, it is available not for everybody. Especially for bad credit owners. But if you are determined to buy a car and you got denied at one of the loan companies, do not rush to give the idea. Check other lenders' requirements, you might qualify.
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Having a credit card in your wallet is considered to be a great convenience and even a privilege. Numerous credit card ads are screaming with numerous advantages of being a credit card holder. But, actually, managing credit cards is easy and convenient mostly in theory. When it comes to practice, credit consumers face a lot of problems and difficult situations.
Let's take penalties, for instance. Late payment fees, default rates, over-the-limit fee and other penalty charges lie in wait for borrowers on every corner. And in some unpredictable situations it is really hard to do everything right and on time with your plastics. Your every misstep in managing your credit cards can cost you money.
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