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Fed cuts rates; will your credit card bill fall, too?

Whether your credit card bill drops depends on issuer, terms

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Fed cuts ratesThe Federal Reserve's rate-setting committee again trimmed a key short-term interest rate Wednesday, this time by one-quarter of a percentage point, but suggested its recent spate of rate cuts may be nearing an end. The move by the Federal Open Market Committee followed a three-quarter percent rate cut on March 18 and brought the federal funds rate down to its lowest level since November 2004.  

Committee members voted 8-2 on Wednesday to lower the federal funds rate from 2.25 percent to 2 percent. It was the seventh consecutive rate cut. In September 2007, the Fed funds rate stood at 5.25 percent. "Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said in the statement accompanying the rate-cut announcement.

The series of cuts "should help to promote moderate growth over time and to mitigate risks to economic activity," the statement said. In simply noting that it will act "as needed," the Fed dropped prior language indicating additional easing could follow in a "timely" manner, also abandoning previous references to downside growth risks. The dissenting voters were  Dallas Federal Reserve President Richard W. Fisher and Philadelphia Federal Reserve President Charles I. Plosser, who preferred no change in rates.

The latest cut puts additional downward pressure on consumers' monthly credit card bills. Most consumers with variable-rate credit cards -- and that's most cardholders -- have interest tied to the prime rate. Because banks always peg their prime rates to the federal funds rate, the prime rate will also fall 0.25 percentage point to 5 percent.

Issuers pass along rate cuts unevenly
Since a majority of card-issuing banks base their annual percentage rates (APRs) on the prime rate, credit card rates may also fall. But credit card issuers also may change their policies at any time with 15 days' notice to consumers, so they may decide to keep the rate cut in their pockets rather than pass it along.

Amid losses from the subprime mortgage industry's collapse, issuers have been more generous with certain types of cardholders than others. According to the CreditCards.com weekly survey of credit card rates, large rate declines of at least 2 percent have taken place in the business, student and instant approval credit card categories since September 2007. Others have seen less rate movement -- the bad credit card segment, which is comprised mostly of fixed-rate cards, has seen limited movement in its rates in seven months.

Credit card rates don't
always follow the Fed

A majority of credit cards are pegged to the prime rate, which moves in lock step with the federal funds rate, set by the Federal Reserve. But Fed rate cuts don't get passed along quickly to consumers, and sometimes they don't get passed along at all.

Credit card rates don't always follow the Fed 

Source: CreditCards.com rate reports, Federal Reserve

Who benefits from rate changes?
Not all credit cardholders are impacted by Fed rate decisions. Whether your credit card rate changes and how soon, is determined by several factors.

Key among them:

•  Whether the card carries a variable rate or a fixed rate. Cardholders will need to read their card agreements to see whether they signed up for a fixed- or variable-rate credit card. Fixed-rate cards, as the name implies, are not pegged to the prime rate. They are set at the number spelled out in the agreement -- but again, the issuer can change that agreement in just 15 days.
•  The timing of the change, as dictated by the card agreement.
•  The decision of card issuers, which can change any term of the agreement, including the interest rate, with just 15 days' notice.

Experts agree that consumers need to check their cardholder agreements to find out what a rate cut means for them. "It depends on what the terms of the contract are," says Dennis Moroney, senior bank card analyst with TowerGroup.

Will rate cut be passed along?
Moroney believes that banks will speedily pass along rate relief to consumers following the Fed announcement. "That should translate into opportunities for lower interest rates on all consumer products," Moroney says. "In this type of rate environment, most banks want to act quickly."  

But some experts believe that credit history will determine whether cardholders enjoy rate relief. In the current environment, "we've split into prime and nonprime," says Tony Plath, associate professor of finance at the University of North Carolina at Charlotte. Following the latest Fed decision, "prime credit card customers are going to see a decrease in borrowing costs, but nobody else will."   

How soon will card rates change?
The card agreement also spells out how soon an issuer will change its variable rates once the prime rate moves. Some can pull the trigger at the end of each billing cycle, others give themselves 90 days.

Making sure you benefit from rate cut
Experts have several recommendations for credit cardholders looking to benefit from the Fed's rate cut:

•  Call your bank. If your credit card's interest rate doesn't fall within a month, call your issuer and ask for a cut. They may agree.
•  Close the account. If that doesn't work, you can opt to pay off your debt at the current rate and switch to a low interest rate card. You won't be able to borrow any more on the old card.
•  Remain disciplined. Focus on keeping your credit score up and consistently making at least the minimum credit card payments. Those steps add up to more than you would gain from Fed rate cuts.

Consumers should consult the disclosures provided by their credit card issuer to find out exactly how and when their own APR will change in the wake of the Fed's decision.

Small savings
These recent interest rate cuts, including the rate cut announced today, cumulatively "has helped some borrowers somewhat. But the effect to borrowers struggling to get out of credit card debt has been negligible," says Michael Rubin, author of "Beyond Paycheck to Paycheck." Rubin explains, "The most important factor to eliminate credit card debt is something you -- not the Federal Reserve -- control. Rather than waiting for outside assistance, take ownership of your personal situation by paying the debt off." 

"Most Americans will receive $300, $600, $1,200 or even more when they receive their tax rebates in May. Put your cash toward your outstanding credit card balance and see some real interest savings right away. That found money is real cash and, used properly, can have a far greater impact to reducing your credit card debt than any Federal Reserve rate cut will have," Rubin says.

See related: "Blog: My interest rate dropped, but not as much as Fed cuts"

Published: April 30, 2008


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