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Fed cuts rates, but card issuers unlikely to follow suit

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The Federal Reserve lowered interest rates yet again, but most credit cardholders shouldn't expect much relief on their annual percentage rates.

Fed funds rate vs. credit card rates

When the Federal Reserve changes the fed funds rate, it also changes the prime rate, which many credit cards are pegged to. However, because card issuers can change rates at any time for any reason, card rates do not always fall when the Fed cuts rates. In addition, some cards have hit rate "floors" and will fall no further. 

  Federal Reserve cuts interest rates a half-point
Sources: Federal Reserve, CreditCards.com rates surveys

In an effort to revive a battered economy, the Fed cut its benchmark rate by half a percentage point. Committee members voted unanimously on Wednesday to drop the federal funds rate from 1.5 percent to 1 percent, equalling the rate's all-time record low. The only other time the federal funds rate dropped to 1 percent was June 2003, and it remained there until June 2004.

It was the ninth consecutive rate cut. The Fed most recently lowered rates by a half point on Oct. 8 in a coordinated emergency move with other central banks worldwide. In September 2007, the Fed funds rate stood at 5.25 percent.

"Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth," the Fed said in the statement accompanying the rate-cut announcement. "Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the Fed said, leaving the door open to further rate cuts if necessary.

The Fed blamed consumer spending for much of the economy's woes, noting that the marked slowdown in the economy was due, in large part, to "a decline in consumer expenditures."

Rate relief for a select few
Even with this movement, however, analysts don't expect a widespread drop in credit card APRs. Fixed rate credit cards, which are not tied to the prime rate, are unaffected by Fed decisions. Although variable rate credit cards tend to be pegged to the prime rate, and therefore are expected to fall when the Fed cuts its key lending rate, that may not be the case amid the ongoing credit crisis. With a series of rate reductions already having taken place, credit card APRs may have hit issuer-imposed "floors" that stop any further lowering.

To prevent having to later change their terms and conditions, "the issuers have gotten very thoughtful in how they've structured this stuff," says Dennis Moroney, research director with TowerGroup, a research and advisory services firm. Moroney notes that these downside floors could halt rate relief for variable rate cardholders. According to USA Today, Wells Fargo, HSBC, Discover, Sun Trust and National City have floors on at least some of their credit cards, while Wachovia has a floor on how low its penalty interest rate for twice late paying customers can fall. Bank of America, American Express and U.S. Bank do not impose APR floors on their credit cards, USA Today says.  

Still, as banks continue to write off bad debt, they may also tentatively seek out new opportunities for recovery, says Syracuse University economics professor Donald Dutkowsky. That could mean lower APRs -- but only for those cardholders with the best credit. "Banks are finding out they have to pay a lot more attention to differences in credit scores of their clientele," Dutkowsky says. "I can't imagine them lowering their rates uniformly."     

Meanwhile, cardholders with poor payment histories would likely not see lower APRs either because they are being charged so-called "penalty rates," which are much higher than those that cardholders with good credit would receive. So, when it comes to rate relief, "the folks that would be most interested might not be the ones who would benefit," Moroney says.

In other words, whether you see any rate relief depends on being a cardholder in good standing, which bank issues your card, which card from that bank you carry and whether it has a variable rate. 

Consider your terms and conditions
That doesn't mean consumers with poor credit scores should abandon hope. Just as there is a way to get into an issuer's penalty box, "the issuers will have a set of terms and conditions for getting out of penalty pricing," Moroney says.  

These penalty pricing rules (such as requiring a certain period of on-time payments) vary by bank but should be outlined in documents provided by the issuer. Cardholders should "refer back to their account terms, which are available by contacting your issuer or perhaps available on their website," Moroney says. 

Published: October 29, 2008


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