Your Credit Card Payments when the Federal Reserve Lowers Interest Rates
Anytime the Federal Reserve decides to lower its interest rates, it leaves Americans wondering how it will affect them. The Federal Reserve usually lowers its interest rates in an attempt to spur economic growth. Therefore, Americans expect some type of relief to their pocketbooks. One of the main ways Americans look to save money when the Federal Reserve lowers interest rates is through their credit card payments. With the average American credit card holder in $5,673 of debt, this is an important question. However, the answer is much more complicated than a simple number.
When the Federal Reserve decides to lower its interest rates, it does not immediately affect the average American’s credit card payment. That is because credit card APR is not directly affected by the Federal Reserve’s benchmark rate. When the Federal Reserve lowers interest rates through its benchmark rate, its prime rates also decrease. The prime rate is what directly affects credit card APR.
Credit card companies are smart; they always want to make sure they are protected against lost profit in case the Federal Reserve lowers its interest rates. Many credit card companies write agreements that fit in a clause into their fine print that allows them to continue using their old APR for 60 more days. The agreement that many Americans unknowingly sign off on is that the credit card company can continue to use the highest prime rate available in the previous 60 days to determine their APR. By doing this, credit card companies can effectively push back any Federal Reserve interest rate cut for two months. Credit card companies will use these 60 days of freedom to continue collecting on your debt at your previous APR. Before signing any credit card agreements, make sure to inquire about this clause. If you can get it removed from the agreement, you can possibly save yourself a great deal of money down the line.
Even after the 60 day period expires, the average American with about $5,000 in credit card debt will not see a drastic cut in their monthly credit card bill. When the Federal Reserve cuts interest rates by a quarter point, the average American will see a meer $1.00 reduction in their monthly credit card payment. This dollar figure varies drastically based on credit card company and how much debt, but there is generally a very small reduction in monthly payment, if any.
Although it is hard to put an exact figure on how much an individual American will save on credit card payments when the Federal Reserve lowers interest rates, the answer is generally about $1.00 per month. Although $12.00 per year may be better than nothing, it is certainly nothing substantial enough to make a difference in the average American’s daily life.