Finally, the Federal Reserve appears poised to cut interest rates in September.
A sigh of relief can be heard from credit card users across the country who are struggling with mounting debt balances. At 5.25% to 5.50%, the highest rate in more than 20 years, the cost of credit card debt continues to rise.
Check out this snapshot of federal rate data.
But the Fed’s decision alone may not give you the relief you’re looking for. After all, many factors come into play. Even if the Fed is , you shouldn’t wait to start paying down your debt.
How will lower interest rates affect credit cards?
Credit card interest rates can change — after all, the APRs on many credit cards change over time — but don’t expect the Fed’s rate cuts to make any major changes to your life.
A rate cut would likely only result in a 25 basis point change. Even if the Fed cuts rates by 50 basis points, the federal funds rate would only move 0.50% to its target of 4.75% to 5.00%.
This likely won’t have much of an impact on credit cards with APRs closer to 25% or 30%.
For example, consider the last time the Fed cut interest rates: in February 2020, before two big cuts at the start of the pandemic. It was 15.09%. By May of that year, when federal interest rates were near zero, the average credit card interest rate had only fallen to 14.52%. It remained there until interest rates began increasing again in early 2022. As of May 2024, the average is 21.51%.
So while credit card interest rates may drop slightly when the federal government cuts interest rates, the difference for cardholders is likely to be minimal.
Additionally, the gap between the federal interest rate and the interest rates charged by credit card companies is widening, another factor that could keep credit card APRs higher regardless of the Fed’s decision.
Credit card interest rates and the APR margin on the prime rate (based on the Fed’s target interest rate) have skyrocketed since the Fed last cut interest rates in 2020. Today, .
What to do if interest rates fall
You can always check your balance in your online account or on your monthly credit card statement. If your balance isn’t automatically reduced, there’s no guarantee, but if your credit score has improved or your income has increased since you applied for the card, it’s more likely to be reduced.
Remember: A low interest rate isn’t a reason to borrow. A lower interest rate may lower your required minimum payment because less interest accrues each day. But paying only that amount can cause your monthly debt balance to balloon.
Instead, you’d be much better off taking action to pay off your credit card debt now.
How to pay off credit card debt
Don’t hesitate to pay off your credit card debt. Here are some options to consider today.
Use balance transfer
These cards offer a 0% APR introductory period on the transferred balance. Currently, introductory periods are typically 12-21 months.
If you do a balance transfer, you’ll need to be prepared to pay a balance transfer fee. These fees cost about 3% to 5% of your total balance. On a $5,000 balance, that could be as much as $250. But don’t be put off by a balance transfer, because this fee is far less than the thousands of dollars in interest you’d pay otherwise.
Here are a few currently available: Some even allow you to continue earning rewards even after you pay off your debt.
Increase your payments
If you’re only making the minimum payments on your credit card balances, now is the time to start putting every penny you can towards paying off that debt. Debt can pile up for years with no end in sight. Even if you can only pay a few dollars more than the minimum each month, your debt will go down more quickly.
For example, say you have a $5,000 balance on a card that has a 21% APR (calculated at 1% of the balance plus accrued interest). It could take you more than 23 years to pay off the balance in full. If you could instead put $200 a month toward your debt repayments, you could pay it off in a much more manageable 37 months.
If it helps you exceed the minimum payment, try implementing methods like the payment snowball or avalanche method or focusing on making multiple payments each month.
Do not add to existing balance
This may be the most obvious action to take, but it’s also one of the hardest to implement: If you’re trying to pay off debt, avoid increasing your balance by making more payments on your cards.
You may lose some of the value of rewards from points or miles you could have earned, but if you have a tendency to overspend with your credit card, we recommend switching to a debit card or cash. The value of those rewards is far less than the amount you’ll spend on interest you won’t be able to pay and paying off your balance.
Consider nonprofit credit counseling.
If you’re really struggling with not being able to get out of debt, you may want to consider credit counseling. A credit counselor can help you create a realistic plan for your spending, manage your existing debt, and even create a debt management plan. This is especially helpful if you don’t have the funds to take advantage of tools like 0% APR cards.
To learn more about credit counseling, or check out a nonprofit credit counseling agency. or .
This article Rebecca McCracken
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