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What the fed rate updates mean for credit cards
Don’t expect immediate, if any, major changes to your account
Following a quarter-percent federal funds rate cut in early August, the Federal Reserve has once again gone to the chopping block, cutting the federal funds rate by an additional quarter percent. This puts the total rate cut at a half percent since August.
The August rate cut was the first change of its kind since 2008. This was a turnabout from the nine rate hikes enacted by the Reserve since 2016, with the ultimate goal to help make borrowing less risky for consumers. While the economy remains strong, it’s thought this most recent cut serves as a protective measure to keep the economy stable in the face of economic uncertainties, including the US’s simmering trade war with China.
Given the fairly conservative cuts so far, the Federal Reserve may well trim even more from interest rates over the next year. This could do even more to convince consumers and businesses to borrow.
| Date of rate change | Rate percent |
|---|---|
| December 20, 2018 | 5.50% |
| July 31, 2019 | 5.25% |
| September 18, 2019 | 5.00% |
How does a rate cut affect credit cards?
Credit card interest rates are linked to a prime rate, and this prime rate is influenced by the Federal Reserve’s benchmark rate. When the Federal Reserve reduces the benchmark federal funds rate, the prime rate typically follows, ultimately reducing the overall interest rates of credit cards.
How does a rate hike affect credit cards?
Just as a rate cut will ultimately lower credit card interest rates, a rate hike increases the benchmark, and thus, the prime rate that credit card companies use to set interest rates. The increases in credit card APRs over the last few years have been a direct result of a series of rate hikes by the Federal Reserve.
What does this cut mean for me?
Consumers may see their credit card purchase APR drop by a similar percentage as the Federal Reserve cut from the benchmark, depending on the issuer’s card policies. So if you had a 17% APR, you might expect this number to drop to around 16.50. Cards with a fixed-rate APR generally won’t have to worry about changes to their existing card rates.
Ultimately, this is a very small cut to interest – and one that credit card issuers could offset by increasing credit card fees in other areas. Even now resting at a half percent, it’s unclear if most consumers will see much, if any, benefit from these recent cuts. And based on our own research, issuers are slow enact changes – both upward and down.
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Bottom line
While more rate cuts could be on the horizon, the best way to save on interest is to avoid racking up interest in the first place. Pay your statement balance in full each month and stay tuned for more developments from the Federal Reserve.
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