The headlines have been full of news of a Federal Reserve rate cut. The Fed's rate decisions can have an impact on savings rates, mortgage rates, and even credit card rates. You'd think a cut would be great news for borrowers, right? That depends on the type of borrower.
The average credit card rates -- and balances -- are so high that a Fed rate cut will not have that much impact on the amount of interest people pay.
Credit card APRs might fall when the Fed cuts rates
It looks pretty likely that the Fed will cut rates at its September meeting. The question is by how much, and what will happen afterward. Economists are expecting a 25 basis point (0.25%) cut at first, with further gradual moves toward lower interest rates in the following months. So don't expect any dramatic changes.
Not only that, but it isn't certain that credit card APRs will follow any Fed cuts.
Credit card APRs can change based on various factors. One of those is the prime rate, which is influenced by the federal funds rate. So, when the federal funds rate falls, credit card APRs may follow. However, as the Consumer Financial Protection Bureau highlighted recently, there's a growing gap between the average credit card APR and the prime rate. That means there's a chance that card issuers won't reduce their rates on the back of any Fed decisions.
Rate cuts will only shave a few dollars off your credit card interest
Assuming your credit card issuer does lower its rates, it may only put a slight dent in your interest payments. We looked at the average interest on an average balance at an average APR and found a rate cut might make a difference of almost $3.
According to Experian, the average credit card balance is $6,501. Let's say you're carrying that average balance and paying 22.76% -- the average rate, according to the Fed. The monthly interest on that balance would be $122.72.
If rates fall by 25 basis points in September and another 25 basis points in the following months, that would be a drop of 50 basis points (0.50%). If credit cards follow suit, that might take your rate to 22.26%. Assuming you're still carrying a balance of $6,501, you'd still pay $120 in monthly interest.
Three ways to pay less credit card interest
Sadly, rate cuts are unlikely to cut your interest payments by much. But you can take steps to stop paying interest to credit companies.
1. Reduce your balance
If you're worried about your credit card balance, you're likely sick of people telling you to pay it down. I'm sorry, but ignoring it won't make it go away. You don't have to pay it down all at once. But the sooner you plan out how you're going to pay it off, the better.
First, sit down with your recent bank statements or a budgeting app and see where your money goes. Look for non-essential spending you can cut back on, even temporarily. The idea is to free up as much cash as possible for credit card payments. If you can take on a side hustle or extra hours at work, that's extra cash you can use to get out of credit card debt.
Next, decide how you're going to tackle your balance. If you have more than one card, you might opt to focus on the one with the smallest balance first so you get the satisfaction of paying it down. Another approach -- called the debt avalanche -- is to prioritize the card with the highest interest rate, before moving on to the next. Whatever route you choose, start making monthly payments to reduce your balance.
2. Call your bank
You might be able to lower your credit card APR by calling the card issuer and asking for a lower rate. If you have a good credit score and a history of making on-time payments, your card issuer may agree, especially if you find competitors offering better rates on similar cards. Do some research before you call. Ultimately, the worst that can happen is they say no.
3. Consolidate your debts
Debt consolidation is about merging your debts into one, ideally with a lower interest rate. It simplifies your payments and hopefully also means you pay less interest overall.
You might use a personal loan, as these often have significantly lower interest rates than credit cards. Alternatively, if you qualify for a balance transfer credit card with a 0% introductory APR, you could use that interest-free period to pay off more of your balance.
Make sure you understand any fees involved. For example, balance transfers often charge a fee of 3% to 5% of the total. Most importantly, think about how you plan to stay out of debt. The worst-case scenario is that you wind up in more debt. That would happen if you run up a new credit card balance while you're still paying off your debt consolidation loan.
You don't need the Fed to shrink your credit card interest
Unfortunately, if you have a credit card balance of thousands of dollars and are paying an APR around 20%, a small rate cut won't make that much difference. The best way to pay less interest is to take steps to pay down your balance. You don't need to wait for the Fed to do that.
