Inflation has made managing finances a challenge for many Americans since the COVID-19 pandemic. In an attempt to manage inflation, the Federal Reserve has steadily increased interest rates since 2022. As inflationary pressures are easing, all signals point to the beginning of interest rate reductions. Federal Reserve Chair Jerome Powell recently said that “the time has come for policy to adjust.”
This leaves many people wondering how a Fed rate cut could affect their credit cards. While an interest rate reduction will offer some assistance on credit card balances, it may not be as much as you hope.
Will credit card interest rates go down with a Fed rate cut?
Credit card interest rates are directly tied to the Prime Rate, not the Federal Funds rate. However, rate reductions by the Federal Reserve often result in movement on your credit card APR.
While you likely won’t see a lowering of your interest rate instantly, it’s fair to expect movement within one to two billing cycles. With the next Fed meeting taking place Sept. 17 and 18, positive movement on rates may come by November.
This is a welcome relief to consumers dealing with historically high APRs on their credit cards, which sat at 22.8% in 2023.
What does a Fed rate cut mean for credit card debt?
A reduction in interest rates on your credit card is typically a good thing. Still, it’s best to keep your expectations in check. Even if the Fed lowers rates by 50 basis points (.50%), movement on your card will likely be nominal.
According to Paul Carlson, CPA and managing partner at Law Firm Velocity, “The impact of a single rate cut is often pretty minimal, especially if you’re carrying a large balance.” To be sure, a rate reduction will offer some help, but not as robust as you may want.
Importantly, rate reductions don’t impact all fees related to your credit card. Annual fees, late payment fees, cash advance fees, and more typically remain unchanged.
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Furthermore, you likely won’t see any relief if you’re struggling with payments. According to consumer and money-saving expert Andrea Woroch, “If you missed any consecutive payments in the last six months, you may be paying a penalty APR and that will not go down until you’ve made at least six consecutive on-time payments, at which point you can call and request to have the penalty removed,” she says.
What a Fed interest rate reduction won’t do for your financial planning
Hope is vital when attacking credit card debt. While a Fed rate cut can provide some help, it’s not a panacea. For example, Carlson notes, “Let’s say your card has a 25% APR and you owe $10,000. Even if the rate drops by a full percentage point to 24% you’d only save around $8 per month in interest.”
Even if your credit card balance isn’t that high, little relief is available through one rate reduction. Worse yet, there’s no telling how many times the Fed will lower rates in the near future.
“It’s very hard to predict the exact timing of these cuts. The Fed may decide to pause after the next cut, or they could keep lowering rates for a while. But you can’t count on a specific timeline,” says Carlson.
This begs the question of whether it is wise to wait until the Federal Reserve is done lowering rates to get serious about your credit card debt. The simple answer is no, according to Woroch. “Waiting is never a good idea, especially since there are no guarantees that the rate will drop significantly. The best approach is to start paying off debt now,” she says. In short, it’s best to view any rate reductions as merely another tool to aid your money management efforts.
Other options to help reduce your interest rate and pay off debt
Consumer debt, especially of the high-interest variety can be suffocating. Thankfully, with some strategic actions, you can use a multi-faceted approach to repay indebtedness.
Here are practical tips you can use to whittle down debt:
- Use a balance transfer card: High interest rates can impede serious progress on repaying debt. The best balance transfer credit cards let you transfer balances to a card that offers 0% APR for up to 21 months. This lets you focus on the principal with no interest. Just make sure to repay it in full before the promotional time is up. Otherwise, you may be charged interest on the entire amount you transfer.
- Request a lower APR: Contact the issuing bank and ask if they will reduce your rate. It’s not a guarantee, but if you’re a good customer they may lower the interest for at least a short term. Any reduction directly applies more of each payment to the principal.
- Consolidate your debt: Debt consolidation gets a bad rap and in some cases, that reputation is warranted. However, using a nonprofit debt consolidation service or a personal loan may provide the leverage you need to repay debt quickly. Do your due diligence before pulling the trigger.
- Pay more than the minimum: Rate reductions are not a reason to be apathetic and only make minimum monthly payments. Any extra payment you make goes directly towards the principal.
- Use the debt avalanche: This is a popular way to repay debt. With this method you focus on paying credit cards in order of the highest interest rate first. You typically save the most on interest with this strategy.
Don’t overlook saving, even small amounts, while attacking high-interest debt. Woroch says, “Those savings will be crucial in keeping you out of debt in the long run as you can use these funds to pay for unexpected bills or emergencies.” This is essential to creating positive money habits as you chart a course toward financial freedom.
➤ FREE TOOL:Balance transfer calculator
The bottom line
Any action by the Federal Reserve to reduce rates will certainly provide some relief, but it’s no cure for credit card debt. Viewing it as simply another helpful tool to ease indebtedness is the best course of action to pursue debt freedom.
