Exciting news for everyone with a credit card: The Federal Reserve may soon decrease the federal funds rate this September.
Many people have been feeling the pressure of high-interest rates on their credit cards. Currently, the federal funds rate is set between 5.25% and 5.50%, which is quite high and hasn't been seen in over 20 years. This has led to credit card interest rates climbing from about 16% in 2022 to more than 21.5% now.
Moreover, credit card debt rose by 5.8% from the second quarter of 2023 to 2024, crossing the $1 trillion mark for the first time in 2023. Also, over the past year, 9.1% of credit card accounts were late in payments by 30 days or more.
But, a cut in the Federal Reserve rates might not mean your credit card interest rates will drop significantly. Even though credit card rates could see a slight decrease, it's important to start paying off your debt regardless.
Understanding the Impact of a Lower Federal Funds Rate on Credit Cards
When the Federal Reserve decreases the federal funds rate, we might see a slight change in credit card interest rates, but don't expect a huge difference. A reduction by the Fed could be by 0.25% or, as some anticipate, by 0.50%.
That means the new rate would be between 4.75% to 5.00%. However, with credit card APRs hovering around 25% to 30%, this decrease may not be very significant for most cardholders.
Remember the last time the Fed cut rates in February 2020? The average credit card rate barely moved. The takeaway? While a rate cut happens, the immediate impact on your credit card interest might be much smaller than expected.
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What to Do If the Federal Funds Rate Drops
Check your current credit card APR on your online account or statement. If it doesn't decrease, you could ask your credit card company for a lower rate, especially if your credit score has improved or your income has increased.
It's crucial to understand that a lower rate doesn't mean you should only make the minimum payments. This approach can lead to growing debt.
To effectively manage your credit card debt, consider the following:
- Consider using a balance transfer card if your credit score is good. These cards offer an introductory 0% APR period, which can help you save on interest.
- Increase your monthly payments beyond the minimum to reduce your debt faster.
- Avoid increasing your credit card balance further. If necessary, switch to using cash or a debit card.
- If you're struggling, think about getting help from a nonprofit credit counseling organization.
In Summary
While a rate cut by the Federal Reserve might offer a little relief, it's not a solution to high credit card debt.
Taking proactive steps to manage and reduce your debt is crucial. Use this opportunity to create a plan that helps you become debt-free.
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