After some encouraging inflation data, the Fed is now expected to start cutting interest rates within the next few months. In fact, the median expectation is for a total of three 0.25% rate cuts in the second half of 2024, and at least another three in 2025, according to the CME FedWatch tool.
While this is definitely good news for consumers who want to borrow money, it’s important to mention that benchmark interest rates like the Fed-controlled federal funds rate impact the various types of consumer debt differently. With that in mind, here’s what falling interest rates could mean for your credit card debt, and why you shouldn’t expect much relief from the Fed alone.
Here’s what Fed rate cuts would mean for your credit card debt
Let’s start with the good news. Your credit card interest rate is directly tied to the benchmark interest rates controlled by the Federal Reserve. This is in direct contrast to mortgages and auto loans, whose rates tend to move in the same direction as the federal funds rate, but there isn’t a direct relationship.
In other words, if the federal funds rate drops by 1%, you can expect your credit card interest rate to do the same.
But here’s the bad news. Even if the Fed were to cut the federal funds rate to zero, credit cards would still be an incredibly expensive way to borrow money.
Think of it this way. Let’s say that you owe $7,951 in credit card debt, which is the average debt of an American household. We’ll also say that your interest rate is 23.99%. This means that each month, you’re paying $158.95 in credit card interest. So, if you send in a $200 payment to the credit card company, just over $41 is going toward the balance.
Now, let’s say that the Fed cuts rates three times in 2024, as expected, by 0.25% each time. This would lower your credit card interest rate to 23.24%. Now, you’re paying $153.98 per month in interest. It’s certainly better, but you’re still putting a lot of money in your card issuer’s pocket.
Of course, lower interest rates are better than higher ones when you’re borrowing money. But don’t assume that the Fed is going to give you serious relief on your credit card debt.
There could be much smarter ways to save on interest
Instead of hoping that the Fed’s interest rate cuts will save you from paying lots of interest, there are better ways to get out of credit card debt.
A balance transfer could be an excellent option if you’re able to pay down the debt fairly quickly. While you’ll have to pay a fee (3% is standard), there are some excellent balance transfer offers in the market today that can lower your APR to 0% for a year or more.
Another option is a personal loan, which is a fixed-rate installment loan that allows you to make equal debt payments over a certain period of time (usually two to seven years). Personal loans certainly charge interest, but the rates you get can be significantly lower than those charged by your credit card issuer.
The bottom line
While your credit card interest rates will certainly go down once the Fed starts lowering rates, the fact remains that credit cards are still an expensive way to borrow money. If your goal is to get out of credit card debt once and for all, a balance transfer or personal loan can be a far more efficient way to do it.
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