Have Credit Card Debt? Don’t Expect the Fed’s Interest Rate Cuts to Help

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Federal Reserve rate cuts will make your credit card interest rates go down. But they might not make much difference for your wallet. Find out why. [[{“value”:”

Credit cards are an expensive form of debt. The average interest rate (APR) on a credit card account that doesn’t have some sort of 0% APR promotional rate is 22.76%, according to the latest Federal Reserve data. This is just shy of an all-time high.

The good news is that the Federal Reserve is expected to reduce benchmark interest rates in September for the first time since 2020, and credit card interest rates are directly tied to the Fed’s moves. Well technically, they’re tied to the prime rate, which depends on the federal funds rate that is set by the Fed.

However, while your credit card’s interest rate is almost certain to go down soon, it’s important to put things into perspective. Here’s how much the Fed’s rate moves could save you on credit card interest, and why you shouldn’t count on too much financial relief.

Expectations for Fed rate cuts

The median expectation right now is a total of 2.5 percentage points of total rate cuts by the Federal Reserve between now and the end of 2025. But it’s important to point out that it’s likely to happen gradually.

Typically, the Fed only cuts rates by 0.25 or 0.5 percentage points at a time, unless an emergency rate cut is needed (this happened at the start of the COVID-19 pandemic, for example). Experts widely expect a quarter-point rate cut in September, and this would cause your credit card’s APR to decline by the same amount almost immediately.

Don’t get too excited

Here’s what this means to you. Let’s say that you have a credit card with a 22.49% APR currently. If the Fed does what is expected and lowers rates by one-fourth of a percentage point in September, your APR will drop to 22.24%.

If you think that doesn’t sound like much of a difference, you’re right.

Let’s say you have $10,000 in credit card debt at a 22.49% APR. As of now, your balance is accumulating interest at a rate of about $187.42 per month. If your APR were to fall to 22.24%, your monthly interest accumulation would be $185.33. That’s really not much of a difference.

With the new rate, you’d avoid about $2 per month in credit card interest. And a 22.24% APR is still a very expensive way to borrow money.

Don’t wait for the Fed to help you

The bottom line is that even after Fed rate cuts, your credit cards will likely still have much higher interest rates than most other ways to borrow. So if you have credit card debt, a smart alternative could be to look into a 0% intro APR balance transfer offer, which ensures that every penny you send to your credit card company will be applied to paying down the principal.

Alternatively, if you need more time (balance transfer offers tend to max out at 18 or 21 months), a personal loan could help you reduce your interest rate. Most personal lenders allow you to check your rate without a hard credit pull, and you might be surprised how much lower a personal loan interest rate can be than a credit card interest rate.

Carrying a credit card balance is expensive. And it will still be expensive after the Fed lowers rates. In fact, credit card debt is expensive even if the Fed were to lower benchmark interest rates to zero. If you owe money on credit cards, it could be a smarter idea to explore some alternatives to pay off your debt.

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