Americans may feel somewhat removed from the Federal Reserve, but the central bank’s moves have a ripple effect on many types of consumer products, most notably the credit cards in their wallet.
Nearly half of American households have credit card debt and pay more than 20% in interest, on average, on their revolving balances — making credit cards one of the most expensive ways to borrow money.
“For millions of American households, credit card debt represents their highest-cost debt by a wide margin,” said Ted Rossman, senior industry analyst at Bankrate.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. When the Fed cuts rates, the prime rate lowers, too, and the interest rate on that credit card debt is likely to follow within a billing cycle or two.
And yet, credit card APRs aren’t falling much at all.
Consumers hoping for “an automatic, proportional drop” in their credit card interest rates “may be disappointed,” according to a new report by CardRatings.com.
When the Fed cut rates in the second half of 2024, lowering its benchmark by a full point by December, the average credit card rate fell by only 0.23% over the same period, CardRatings found.
The central bank lowered its benchmark rate by a quarter point again last month. Yet the average credit card rate in the CardRatings survey was 24.22% for the third quarter, down just 0.09% from the previous quarter.
The correlation between the Fed funds rate and credit card rates is often “weaker” than expected, said Jennifer Doss, CardRatings.com’s executive editor. Credit card rates are also “heavily influenced by credit conditions and individual credit scores,” she said.
‘A highly competitive market’
“If the Fed continues to lower interest rates, consumers will likely see some declines in credit card APRs, but that may take some time and could vary depending on the type of card and individual issuer,” said Jeff Sigmund, a spokesman for the American Bankers Association.
“Credit card interest rates are set in a highly competitive market,” he said.
Generally, card issuers have several ways to mitigate their exposure to borrowers who could fall behind on payments or default. For example, issuers may trim back the lower end of the APR range (what’s charged to more creditworthy borrowers) but not the high end, said Rossman.
For some retail credit cards, APRs are even rising, despite the Fed’s moves, according to a Bankrate survey. Banks that issue store-branded credit cards have said maintaining higher APRs was necessary following a Consumer Financial Protection Bureau rule limiting what the industry can charge in late fees.
But even after bank trade groups succeeded in killing the CFPB rule earlier this year, some credit card companies, including Synchrony and Bread Financial, said they would not roll back the hikes.
Even if your credit card rate were to fall by a full quarter point, in lockstep with the Fed’s latest cut, it might go from 20.12% to 19.87%, Rossman said, “that’s still very high-cost debt.”
At these rates, there isn’t much in the way of relief for consumers. “We’re talking a difference of $1 a month for someone making minimum payments toward the average balance,” Rossman said.
Of course, only consumers who carry a balance from month to month feel the pain of high APRs.
“The real consumer benefit lies in making your personal credit card rate 0%, either by paying in full — if you can — or signing up for a 0% balance transfer card,” Rossman said of cards offering 12, 15 or even 21 months with no interest on transferred balances.