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What credit card users need to know if the Fed cuts rates in September

Yahoo Personal Finance· Associated Press
Kendall Little
·Senior Writer, Credit Cards
Updated 6 min read

Finally, the Federal Reserve looks poised to lower rates at its next FOMC meeting in September.

Cue sighs of relief from credit card users across the country plagued by rising debt balances. Through the current high rate environment — the target federal funds rate sits at 5.25%-5.50%, a more than 20-year high — the cost of their credit card debt has only grown.

Look no further than this snapshot of federal rate data:

But the Fed’s decisions alone may not offer the relief you’re looking for. After all, plenty of factors influence your credit card’s interest rate. Even if the Fed lowers federal interest rates, you shouldn’t wait to begin paying down debt.

Credit card interest rates could change when the Fed lowers rates — after all, many credit card APRs are variable and move over time. But don’t count on lower interest rates from the Fed to make a very significant difference in your credit card interest charges.

A single Fed rate cut is likely to only move the needle by 25 basis points. Even if, as some experts predict, the Fed makes a 50-basis-point cut, the fed funds rate will only move by 0.50% to a target 4.75% - 5.00%.

That’s not likely to have much effect on credit cards sitting near 25% or 30% APR.

Consider, for example, the last time the Fed cut rates. In February 2020, before two steep rate cuts at the start of the pandemic, the average credit card interest rate was 15.09%. By that May — when federal interest rates were near zero — average credit card rates only fell to 14.52%. They remained around there until rate hikes started again in early 2022. As of May 2024, the average is 21.51%.

So, while credit card rates may dip a bit when federal rate cuts happen, the difference for cardholders can be minimal.

What’s more, there’s a growing gap between federal interest rates and the rates credit card companies charge — another factor that could keep your credit card APR high regardless of the Fed’s decisions.

The APR margin between credit card interest rates and the prime rate (based on the Fed’s target rate) has skyrocketed since the last time the Fed cut rates in 2020. Today, APR margins are at an all-time high.

You can always find your current APR through your online account or on your monthly credit card statement. If it isn’t automatically lowered, you may even ask your issuer for a lower APR — while there’s no guarantee, you may have a better chance if you’ve improved your credit score or increased your income since you applied for the card.

Just remember: Lower interest rates are not a reason to make only minimum payments. You may see your required minimum payment decrease because a lower interest rate means fewer interest charges can accrue daily. But paying only that amount can leave you with mounting debt balances each month.

Read more about how to avoid paying interest on your credit card.

Instead of waiting for relief from the Fed, you’ll be much better off taking action to clear your credit card debt now.

Don’t wait to get ahead of your credit card debt. These are some options to consider today:

You may qualify for a balance transfer credit card if you have a solid credit score. These cards carry an introductory 0% APR on your transferred balances. Today, intro periods typically range from 12 to 21 months.

When you transfer your balance to the new card, you should be prepared to pay a balance transfer fee. These fees can set you back around 3% to 5% of your total balance. On a balance of $5,000, that could be as much as $250. Don’t let that dissuade you from a balance transfer though — the fee is still much less than the thousands you could otherwise pay in interest.

Here are a few of the best balance transfer credit cards available today. Some even offer rewards you can continue to earn after you pay down your debt.

If you’re only making minimum payments toward your credit card balances, now is the time to start putting as much as you can toward paying down your debt. Minimum payments can leave you with mounting debt balances for years and no end in sight. Even if you can only pay a few dollars more than the minimum each month, you’ll start to chip away at the debt more quickly.

Say you have a $5,000 balance on a card with a 21% APR. With minimum payments (calculated as 1% of the balance plus accrued interest), it could take you more than 23 years to pay the balance in full. If, instead, you could dedicate $200 toward the debt each month, you could pay it off in a much more manageable 37 months.

Try implementing debt payoff strategies like the snowball or avalanche method, or focus on making multiple monthly payments if it helps you get ahead of your minimum.

It may be the most obvious move, but one of the toughest to implement: If you’re working on paying down debt, try not to spend more on your card and increase your balances.

You might forfeit some rewards value from the points and miles you would otherwise earn, but it can be a good idea to switch to a debit card or cash if you have a tendency to overspend using credit. Those rewards are not worth nearly as much as you’ll spend paying down interest charges and balances you can’t afford.

If you’re really struggling with long-term debt that never seems to go down, you may want to look into credit counseling. A credit counselor can help you develop a realistic budget for your spending, manage existing debts, or even develop a debt management plan. This can be especially useful if you don’t have the great credit score required to take advantage of tools like a 0% APR card.

To get started, you can learn more about credit counseling through the Consumer Financial Protection Bureau, or look into nonprofit credit counseling organizations like the National Foundation for Credit Counseling or the Financial Counseling Association of America.

This article was edited by Rebecca McCracken

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