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The Fed’s rate cuts won’t help much if you have credit card debt

Interest rates could sink to zero in the weeks to come. But any savings on card balances you owe will amount to a drop in the bucket

Summary

The Federal Reserve is expected to cut interest rates again next week, perhaps by an entire percentage point. But it won’t provide much relief if you’re carrying a high credit card balance.

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The Federal Reserve made an emergency 50-basis-point cut to the federal funds rate on March 3 in an effort to stimulate an economy reeling from the coronavirus outbreak.

Investors are anticipating another substantial reduction next week after the Federal Open Market Committee’s scheduled meeting concludes on March 18. According to the popular CME FedWatch Tool, market participants have priced in a 78% chance that the Fed will lower rates 100 basis points and a 22% chance the Fed will cut by 75 basis points.

That potential 100 basis point decrease – a full percentage point – would effectively bring the federal funds rate to zero (technically 0% to 0.25%).

That’s where it sat from December 2008 (spurred by the Great Recession) all the way until December 2015. From late 2015 through late 2018, the Fed raised rates nine times (a quarter-point apiece, for a grand total of 225 basis points). It cut rates three times in 2019 (again a quarter-point apiece), followed by the emergency 50-basis-point reduction last week.

See related: Coronavirus: Can credit card travel insurance help?

How rate moves since 2015 have affected cardholders

I took a detailed look at the cards in CreditCards.com’s weekly rate report database, and here’s what I found:

A month after the nine most recent rate hikes, the average rate for credit card holders with good credit rose 20 basis points. I calculated that by averaging the low end of the credit card APR range charged by 100 popular cards (as in, what people with better credit were offered). Two months later, it increased by an average of 22 basis points.

This is consistent with our typical advice: Expect a rate hike to filter through within one to two statement cycles.

The cumulative effect was much more significant than any of these rate hikes in isolation. On Dec. 16, 2015 (the day before the Fed’s first rate hike of this cycle), the average credit card rate was 14.99% (again, the average of the low end of the APR range).

On July 30, 2019 (the day before the Fed’s first rate cut of this cycle), the average was 17.80%. In other words, the federal funds rate went up 225 basis points in that time and the average credit card rate was 281 basis points higher.

It’s important to note that while most credit cards have variable rates pegged to an underlying index (usually the prime rate, which is generally three percentage points higher than the federal funds rate), this refers to existing balances.

Card issuers have a lot more latitude to set rates on new purchases. So if their rate used to be 12% (their profit margin) plus the prime rate, they could decide to make it 12.5% (or something else) plus the prime rate if they choose. They just need to give cardholders 45 days’ notice.

Rate cuts’ impact on indebted cardholders is minimal  

For someone making minimum payments toward $5,000 in credit card debt, a 17.80% APR would cost them about $1,200 more in interest than a 14.99% APR. They’d be in debt for 273 months rather than 266. The monthly payments would start around $125 instead of $112. (More than anything, this exercise illustrates why you should pay much more than the minimum payment – ideally, pay in full, or open a 0% balance transfer card to save on interest.)

The three 2019 rate cuts didn’t help credit card debtors much at all. One month later, the average rate was 20 basis points lower, and two months later, the average was 36 basis points lower.

Still, that amounted to a drop in the bucket for someone making minimum payments against a $5,000 debt (a savings of a buck or two per month). Last week’s rate cut has only begun to impact credit card holders, but again, the savings will be minimal. In about a week and a half, the national average fell from 17.35% to 17.08%.

Turning to a subset of cards marketed specifically to people with bad credit, an interesting recent development is that the riskiest borrowers benefited even less from falling rates than cardholders with good credit. The average “bad credit” rate fell only 12 basis points two months after the 2019 rate cuts, one-third as much as the drop for cardholders with good credit. It currently sits at a very pricey 25.24%.

See related: Coronavirus is making the economy ill, and it’s likely to get worse

Bottom line

No matter your credit score, if you have credit card debt, don’t expect the Fed to ride to your rescue. Even if it lowers rates by a full percentage point, the low end of the credit card APR range will probably still be around 16% and the high end will likely remain north of 24% (for existing debt). And for new purchases, the rates could be higher.

Your best approach is to jump on a 0% balance transfer offer ASAP. Falling rates might lead issuers to trim back the length of these promotions (the longest is currently 21 months, a tie between the Citi Simplicity® Card (then 14.74% – 24.74% variable APR) and the Citi® Diamond Preferred® Card (then 13.74% – 23.74% variable APR).

Both charge a 5% transfer fee upfront ($5 minimum). This has become the most common within the industry, up from 3% not long ago. That’s another example of card companies raising some fees to compensate for lower profits elsewhere.

My favorite balance transfer cards do not charge a transfer fee. The longest such offers are for 15 months with no interest and no transfer fee (if you transfer the balance within 60 days): the Chase Slate card (then 16.49%-25.24% variable APR), and the Amex EveryDay® Credit Card from American Express (13.99% to 24.99% variable APR).

Depending on how much you owe, you could save hundreds or even thousands of dollars via one of these offers, especially if you’re able to pay in full by the time the clock runs out. Take on a side hustle, sell unneeded possessions or cut expenses to turbocharge your efforts.

Have a question about credit cards? Email me at ted.rossman@creditcards.com and I’d be happy to help.

Editor’s note: Information about Chase Slate and Amex EveryDay Credit Card has been collected independently by CreditCards.com. The issuer did not provide the details, nor is it responsible for their accuracy.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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Credit Card Rate Report Updated: September 23rd, 2020
Business
13.91%
Airline
15.48%
Cash Back
15.94%
Reward
15.78%
Student
16.12%

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