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This article was last updated Sep 18, 2019. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.
The Federal Reserve lowered interest rates for the second time this year on Wednesday. However, a new CompareCards by LendingTree report shows that only a tiny fraction of cardholders knows what impact that decrease will have on their credit card’s APR.
At the end of its two-day meeting on September 17-18, the Fed announced that it would lower the federal funds rate by a quarter of a percentage point, a move which will impact millions of credit cardholders across the country. The reduction was widely expected, with some observers even believing that a larger half-point reduction was a possibility. With the imminent rate reduction in mind, CompareCards polled cardholders to see what they think of the Fed’s recent moves and if they know what the real impact of those moves will be on the average American’s wallet.
We found that while most cardholders think a rate decrease from the Fed will be a good thing, a large majority of cardholders don’t know what that decrease really means for them.
So what does it mean? For most cardholders, it means a lower interest rate on your credit card.
Most credit cards in the United States – including 96% of the cards that CompareCards tracks rates for each month – are so-called variable-rate cards. That means that when the Federal Reserve raises or lowers its interest rate, those cards’ rates will go up or down by the same amount. If the Fed raises rates by 0.25%, your credit card’s APR will likely go up by 0.25% within a couple of billing cycles. If it lowers it by 0.25%, as we expect later this week, your card APR will go down by 0.25% within a similar timeframe.
That happens because variable-rate cards are tied to the prime rate, which is basically the rate that banks charge their best customers. When the Fed changes its rates, the prime rate moves up or down by the same amount, which causes variable rate card APRs to change, too.
All that said, there are some fixed-rate cards out there that don’t move when the Fed changes rates. Also, there are cards that are tied to something other than the prime rate. However, those are far less common.
If you think that’s confusing, you’ve got plenty of company. Our survey found that a large majority of cardholders don’t grasp the impact of a Fed rate reduction.
- Cardholders don’t know what a Fed rate cut would mean for their card’s interest rates.
- We asked cardholders what they thought would happen to their credit card’s interest rate should the Fed cut rates by 0.25%, and nearly 1 in 3 admitted they had no idea – the most common answer given.
- Just 8% gave the correct answer, which is that their credit card’s APR would also decrease by 0.25%.
- Most (51%) cardholders think it will be a good thing if the Fed lowers interest rates at their next meeting. Just 9% of those surveyed said lowered rates would not be a good thing. However, nearly 16% of cardholders said they weren’t sure if that would be good or bad, and 24% said it might be good.
- Similarly, most cardholders are unsure or mistaken about what the Fed has been doing with interest rates for the past four years. Just 24% of cardholders correctly said that rates had been increasing but were lowered most recently.
- 18% thought rates have been largely unchanged for years, about 16% said rates have been up and down several times with no particular pattern, and 7% said rates had been decreasing, but were increased most recently.
- Those with at least a bachelor’s degree were more likely to answer this correctly than those without.
- Millennials were most likely to answer this question correctly.
- The higher your income, the more likely you were to answer this correctly.
- Men more likely to answer correctly than women.
- Overall, women were more likely than men to admit they did not know the answer to any of these three questions. That doesn’t necessarily mean men know more about the Fed, just that women were more likely to acknowledge their lack of knowledge on the subject.
The bottom line: Don’t wait for the Fed. Take action yourself.
As someone who once was drowning in credit card debt, I can tell you that any little bit of assistance in tackling that debt is always welcome. However, the truth is that any savings you see from this one rate cut from the Fed won’t amount too much.
- If you owe $6,000 on a credit card with a 17% APR and pay $250 monthly, you’ll pay $1,385 in interest and it will take 30 months to pay it off.
- Leave everything else the same but reduce your APR a quarter-point to 16.75% and you’ll pay $1,358 in interest and take the same 30 months to pay it off.
- That’s a savings of just $27 over 30 months, less than a dollar per month.
Most people won’t even notice that savings, but the good news is that there are two specific moves that you can make that can save you far more than that.
Call and ask for a lower APR: You have way more power over your credit card issuer than you realize, but you must be willing to wield it. A recent CompareCards survey found that 81% of those who asked for a reduced APR got one – and the average reduction was 6 percentage points. That’s a big deal and can potentially save you hundreds of dollars or more in interest and shorten your payoff time.
Those with good credit and a long track record with the issuer in question are most likely to get their way, but the success rate is so high overall that it is clearly not just folks with 800 FICO scores who are getting reductions.
Get a 0% balance transfer card: This one can come back to bite you if you don’t use the new card wisely, but if you do, it can be a huge help. Many cards today offer interest-free periods of 12 to 15 – and even up to 18 – months, providing a long reprieve from interest charges, which can really help those struggling with credit card debt.
Before you apply, it’s important to understand all the fees, deadlines and other quirks that go along with the card. (What you don’t know can cost you.) You also must be sure not to simply see the card as an excuse to go on a spending spree and get yourself deeper in debt. If you do that, these cards can be far more impactful than any single rate cut from the Fed would ever be.
CompareCards by LendingTree commissioned Qualtrics to conduct an online survey of 766 credit cardholders. The survey was fielded September 5-9, 2019, and the sample base was proportioned to represent the general population. For the purposes of our survey, generations are defined as follows: Members of Gen Z are currently between the ages of 18 and 22, millennials are currently between the ages of 23 and 38, Gen X is between the ages of 39 and 54, baby boomers are 55 to 73, and members of the silent generation are 74 and older.