Cuts in Credit Card Rates May Be Slow in Coming

[Oct 17, 2007.]

Credit card holders across the U.S. may be breathing a sigh of relief, now that the Federal Reserve has decided to trim interest rates. However, it could be some time before credit card customers notice a change in their rates.

Last week, the Fed chose to reduce the federal funds rate by a half point. Since prime rates are tied to the federal funds rate, the prime rate is also dropping - to 7.75%. Credit card issuers calculate their annual percentage rates, or APRs, according to the prime rate. As a result, credit card interest rates are expected to drop as well.

Yet, there are a few caveats to all this. For instance, a great deal depends on whether a credit card customer holds a fixed card or a variable card. That's because fixed-rate cards do not rely on the prime rate. As a result, fixed rate card holders may be unaffected by the Fed's decision.

In contrast, those with variable rates may see a quick decline in the amount of interest they have to pay each month. The rate change could come as soon as the close of the billing cycle or, depending on the card holder agreement, as long as 90 days.

In addition, even those with variable rate credit cards may see only a slight difference in the amount of interest they will be paying. In some cases, the decline in rates may lead to a reduction of only about a dollar a month.

What this all means is that credit card customers should not become overly excited about the Fed's decision to cut interest rates. While the move may help to boost the overall economy, it will not result in a dramatic reduction of credit card bills. In the end, consumers may find that their best defense against high credit card bills is simply to limit their charging.

Julie Ann Amos
October 17th 2007

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