The Federal Reserve has voted to cut its benchmark interest rate to near-zero amid fears over the coronavirus outbreak. Credit card holders who carry balances could soon see their interest charges drop, but it won’t offer much relief.
The latest rate cut, preceded by three quarter-point rate decreases in 2019 and a half-percentage-point cut earlier this month, lowers the federal funds rate to 0% to 0.25%. It’s the lowest the Fed’s benchmark rate has been since December 2015, when it began to normalize rates in the wake of post-recession recovery.
In a March 15 statement, the Fed said rates would remain in that range until the economy has “weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Spooked by the ongoing human and financial casualties of coronavirus, investors have been dumping stocks and pumping money into the bond market, contributing to worries about long-term economic damage and helping spur talk of another cut in interest rates.
For credit card holders and applicants, the coronavirus-related drop in interest rates could mean lower costs to borrow money. However, despite the federal funds rate falling to near-zero, that cost reduction likely won’t help much if you’re in credit card debt.
How might all of this play out?
Before we dive into the financial implications, let’s start with a brief history of the coronavirus, formally known as COVID-19. The flu-like virus first emerged in late December in China but since has spread to more than 140 other countries. As of March 15, the virus had infected over 160,000 people around the world, with more than 6,000 deaths reported. In the U.S., there were 3,244 confirmed cases and 62 deaths.
Next, let’s zero in on recent monetary events connected to coronavirus.
The yield on bench mark 10-year U.S. Treasury bonds stood at 0.94% on March 13, down from 1.9% at the outset of 2020 and from 2.6% a year ago. The yield is falling as jittery investors pull out of the stock market – causing a tumble in stock prices – and switch to less risky alternatives like Treasury bonds.
In 2019, the Federal Reserve trimmed interest rates three times. The most recent of those cuts, approved in October, pushed down rates to a range of 1.5% to 1.75%. That range involves the so-called federal funds rate, the key interest rate in the U.S. It’s the rate that banks charge one another for short-term borrowing.
The federal funds rate influences other interest rates, such as the prime rate, which is the rate that banks charge their top customers, the Federal Reserve Bank of St. Louis explains. Furthermore, the federal funds rate affects longer-term interest rates for consumer borrowing.
Some experts predicted the Fed would carry out an interest-rate cut in March aimed at easing potential coronavirus-driven harm to the economy.
See related: Coronavirus: Can credit card travel insurance help?
How much does credit card APR matter?
The APR (annual percentage rate) is the charge that you normally end up paying if you don’t wipe out your monthly balance and you carry your debt over to the following month. Unlike other financial products, a credit card APR doesn’t take into account fees and other expenses.
Using lower-APR credit cards versus higher-APR credit cards could result in hundreds or even thousands of dollars of savings over a year’s time, depending on how many cards you have.
Looking at the coronavirus crisis more broadly, credit card APRs might be fairly irrelevant to many cardholders.
In part, that’s because a lot of Americans are likely far more concerned about avoiding illness. In a poll taken Feb. 13-18 by the Kaiser Family Foundation, 55% of Americans said they were worried that the U.S. would experience a widespread outbreak of coronavirus.
In addition, card-holding consumers might curb spending amid virus-triggered economic woes.
Results of a survey released Feb. 28 by Coresight Research show that in response to coronavirus, 28 percent of Americans already are avoiding public places like malls, restaurants and theaters – three major sources of discretionary spending.
Even more troubling, 58% of those surveyed said they’d probably stay away from public places if the epidemic worsens. In the Kaiser poll, 57% of Americans said they were concerned that the U.S. economy would suffer because of the virus.
“I do fear that the economic and societal impacts will get worse before they get better,” said Ted Rossman, industry analyst at CreditCards.com. “The ripple effects will be massive if our schools, workplaces, transit systems and entertainment destinations shut down like they have in other countries.”
See related: How does credit card APR work?