What the Fed cuts will mean for credit card interest rates
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The Federal Reserve delivered a super-sized cut to interest rates Wednesday, bringing a measure of relief for consumers struggling to pay down their credit card balances.
Why it matters: Soaring credit card rates and inflation have contributed to the economic pinch many everyday Americans have felt over the past few years as household budgets strained and views of the economy soured.
The big picture: The average credit card interest rate currently stands at 20.78% — close to the highest on record and up from roughly 16% in 2022. The current average interest rate for store-branded retail credit cards is even higher, at a record peak of 30.45%.
- Credit card delinquencies have also been on the rise.
How Fed rate cut will affect credit card APR:
- The Fed's short-term interest rates are closely tied to credit card interest rates.
- Most cardholders can expect to their rates to fall by the same percentage the Fed cuts by — in Wednesday's case, half a percentage point — within two or three statement cycles, Greg McBride, Bankrate's chief financial analyst, told Axios.
State of play: While one rate cut on its own will have a limited impact, this is widely expected to be the first of several cuts through the rest of the year and into 2025, McBride said.
- "A year from now, cardholders may see rates that are meaningfully lower than today," he added.
Zoom in: As interest rates go down, the monthly interest charge added to a consumer's credit card balance will also come down.
- For consumers focused on debt repayment, this underscores the importance of maintaining a consistent monthly payment now that their money will go further towards decreasing their balance, McBride noted.
- This has a "snowball effect, because then the next month, the balance is even lower at the lower rate, which means even lower interest charges" with even more of the payment going towards the principal balance, he added.
The bottom line: Consumers with credit card debt need to be aggressive about their repayment plans. At the end of the day, interest rates "aren't going to fall enough to get you out of a bad situation."
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