Why credit card APRs aren’t coming down, even after a Fed rate cut
Americans may feel somewhat estranged from the Federal Reserve, but the central bank’s moves are having a ripple effect on many consumer products, especially the credit cards in their wallets.
almost half A majority of American households have credit card debt and pay interest on average more than 20% of their revolving balance; This makes credit cards one of the most expensive ways to borrow money.
“For millions of American households, credit card debt represents the highest-cost debt by a wide margin,” said Ted Rossman, senior industry analyst at Bankrate.
Since most credit cards have variable interest rates, there is a direct link to the Fed’s benchmark. When the Fed lowers interest rates, the interest rate drops as well, and the interest rate on credit card debt likely follows within a billing cycle or two.
But still, credit card APRs don’t drop much.
Consumers expecting an “automatic and proportionate reduction” in credit card interest rates “may be disappointed,” according to a new report report By CardRatings.com.
CardRatings found that when the Fed cuts rates in the second half of 2024, dropping its benchmark rate by a full point by December, the average credit card rate fell just 0.23% over the same period.
The central bank cut its benchmark interest rate by a quarter point once again last month. However, in the CardRatings survey, the average credit card rate was 24.22% in the third quarter. 0.09% compared to the previous quarter.
Jennifer Doss, managing editor of CardRatings.com, said the correlation between the Fed funds rate and credit card rates is generally “weaker” than expected. Credit card rates are also “heavily affected by credit terms and individual credit scores,” he said.
‘A market with high competition’
“If the Fed continues to lower interest rates, consumers will likely see some reduction in credit card APRs, but that may take some time and 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.
In general, card issuers have a variety of ways to reduce their exposure to borrowers who may default on payments or default. For example, issuers can cut the lower end of the APR range (which applies to more creditworthy borrowers) but not the upper end, Rossman said.
APRs on some retail credit cards are rising despite the Fed’s moves, according to Bankrate. questionnaire. Banks that issue store-brand credit cards have said they are required to maintain higher APRs under the Consumer Financial Protection Bureau’s rule limiting how much the industry can charge late fees.
But even after bank trade groups became successful kill Earlier this year, under the CFPB rule, some credit card companies, including Synchrony and Bread Financial, said they would not roll back the raises.
Even if your credit card interest rate drops a full quarter point in line with the Fed’s latest cut, it could drop from 20.12% to 19.87%, Rossman said. “That’s still a very high-cost debt.”
There is not much to reassure consumers at these rates. “We’re talking about a difference of $1 a month for someone making minimum payments versus the average balance,” Rossman said.
Of course, only consumers who can balance month to month feel the pain of high APRs.
“The real consumer benefit is making your personal credit card rate 0% by paying in full if you can or by signing up for a 0% balance transfer card,” Rossman said of cards that offer 12, 15 and even 21 months with no interest on transferred balances.
