Don’t Be Fooled: Fed’s Interest Rate Cut Has Almost Zero Effect on Your Credit Card Debt
04 Octubre 2024 - 9:48AM
Despite the recent interest rate cut by the Federal Reserve,
consumers should not expect any significant impact on their credit
card debt. While the Fed’s decision to lower interest rates may
provide some relief for new loans or mortgages, the effect on
credit card interest rates is minimal, according to experts at
Money Management International (MMI).
“Typically, consumers feel the impact of Fed rate changes when
they take out new debt," said Kate Bulger, Vice President of
Business Development at MMI. “For example, someone taking out a
mortgage today may see a lower interest rate than a few months ago,
saving them money over the life of the loan. However, the story is
different for credit cards, where the interest rates often remain
high despite Fed rate cuts.”
Why Credit Card Interest Rates Stay High
While the Federal Reserve sets the rate banks use when lending
money to each other, this does not directly translate into lower
credit card interest rates. Credit card issuers often add three
percentage points to the Fed’s rate to determine the Prime Rate,
which is the starting point for determining a consumer’s annual
percentage rate (APR).
"Each lender sets their own rates based on factors like your
credit score, payment history, and overall debt," Bulger explained.
"If you’re paying 22% APR today, the recent Fed rate cut may only
drop it to 21.5%. Over-limit balances or missed payments,
triggering what’s known as a ‘penalty rate’, may prevent any rate
reduction at all."
The Lag Between Fed Rate Cuts and Credit Card
Rates
Many consumers are surprised that their credit card interest
remains unchanged even after the Fed cuts rates. Bulger points out
that there is often a lag between the Fed's decision and any
noticeable change in credit card interest rates.
"If you don’t see a change in about 45 days, it may be due to
other factors, like your outstanding balance or credit history,"
said Bulger. “While credit card interest rates rise along with
interest rate increases from the Fed, they typically don’t follow
the Fed downward as quickly.”
Credit Card Debt on the Rise
According to the MMI Consumer Distress Dashboard, the average
credit card debt balance among new MMI clients has risen by 31%
since 2022. At the same time, new clients are ending each month
with a household budget deficit that has grown by 74% during the
same period.
"We talk to consumers every day whose lives are held back by
credit card debt," said Bulger. "Their financial goals, from saving
for a home to taking a family vacation, are put on hold because of
their debt. It doesn’t have to be that way, and we’re here to help
them find a path forward."
About MMI
Money Management International (MMI) has been at the forefront
of financial health solutions for over 65 years. As a leading
nonprofit organization, MMI is dedicated to changing how America
overcomes financial challenges by delivering timely and expert
guidance. Recognized by major financial organizations and media
outlets, MMI’s programs help individuals reach their financial
goals and foster a life of financial wellness. Learn more at
MoneyManagement.org.
For reporters looking to interview real people for
stories, MMI has created a group of nearly 500 clients from across
the country who are willing to share their experiences with the
media in the hopes of helping others challenged with debt. Our peer
advocates have paid off over $19 million of debt and now serve as
MMI ambassadors. Hear from them on MMI’s podcast,
Long Story $hort.
To schedule an interview with Kate Bulger or an MMI
client, please contact:
Thomas Nitzsche, 404.490.2227,
Thomas.Nitzsche@MoneyManagement.org
Lori Geary, 404.551.2151, lgeary@lexiconstrategies.com
Thomas Nitzsche
Money Management International
404.490.2227
Thomas.Nitzsche@MoneyManagement.org
Lori Geary
Lexicon Strategies
404.551.2151
lgeary@lexiconstrategies.com