Credit card debt and the Fed’s rate cut

Wall Street and Main Street are kicking off the fall season with the first rate cut since March 2020, the start of the COVID-19 pandemic, and with it comes hopes of lower borrowing costs.

The Federal Reserve cut rates by 50 basis points in September, a bigger move than some expected, boosting investor sentiment.

While this may drive down rates on mortgages, car loans and personal loans, those with credit card debt will likely be out of luck in the short term.

“That’s where the real advice lies. Don’t expect the Fed to come to your rescue,” Ted Rossman, Senior Industry Analyst at Bankrate, told FOX Business ahead of the move. “The change won’t be that big. My other big point is that a quarter point, a half point, even if credit card rates go down a few points, it’s not that big of a difference. Just because the rates are so high, he warned.

A customer enters a Visa credit card via credit card payment via a touchscreen at a Five Guys restaurant in Queens, New York. (Lindsey Nicholson/UCG/Universal Images Group via Getty Images)

THE DEMANDS OF CREDIT COUNSELING IN THESE STATES

The average annual percentage rate on standard credit cards is about 20.76%, according to Bankrate, while some in-store retail cards, like Bloomingdale’s, are as high as 31.99%.

Bloomingdale’s credit card statement (FOX Business)

For example, for those who have a $1,000 balance on a credit card, a 50 basis point interest rate cut could lower your annual interest rate to 20.26% versus 20.76%, according to Bankrate estimates. The decrease in monthly financing costs would be a paltry $0.42 less. Your minimum payment would likely remain unchanged, as outlined by Greg McBride, Bankrate’s chief financial analyst.

Fed Chairman Jerome Powell also indicated that policymakers will continue to cut rates this year and perhaps even further.

“This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving towards a more neutral stance. Of course, we will make our decisions over and over again, we know that reducing policy discretion too quickly can hinder progress on inflation,” Powell said during his press conference.

FED Chairman POWELL REVEALS PLANS FOR RATE SAVINGS

The Fed’s current target is now 4.75%-5.00% with a projected target of 4.4% by the end of the year, 3.4% by the end of 2025 and 2.9% by 2026. Of course, all this could change depending on general economic conditions.

Currently, market participants are divided on whether the Fed will cut by 25 or 50 basis points at its November meeting, according to the CME’s FedWatch Tool, which measures the likelihood of future interest rate movements. The last meeting of the year takes place in December.

Even if policymakers stick with a easing cycle, it will still take a few rounds to make a meaningful difference to credit card APRs.

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“We think the Fed will be much slower on the way down than on the way up,” Rossman warns.

Instead of waiting for the Fed, Rossman suggests exploring other options.

“Maybe you can get a 0% balance transfer card or take a perk. Reduce your expenses. I mean, there are other things you can do, but Fed rate cuts by themselves aren’t going to make a big difference. the credit card world,” he said.

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*This article, originally published on September 1, 2024, has been updated.