Don’t Be Fooled: Fed’s Interest Rate Cut Has Almost Zero Effect on Your Credit Card Debt

Nonprofit credit counselor explains why consumers carrying high-interest credit card debt will see little to no relief from recent rate cut

/EIN News/ -- STAFFORD, Texas, Oct. 04, 2024 (GLOBE NEWSWIRE) -- Despite the recent interest rate cut by the Federal Reserve, consumers should not expect any significant impact on their credit card debt. While the Fed’s decision to lower interest rates may provide some relief for new loans or mortgages, the effect on credit card interest rates is minimal, according to experts at Money Management International (MMI).

“Typically, consumers feel the impact of Fed rate changes when they take out new debt," said Kate Bulger, Vice President of Business Development at MMI. “For example, someone taking out a mortgage today may see a lower interest rate than a few months ago, saving them money over the life of the loan. However, the story is different for credit cards, where the interest rates often remain high despite Fed rate cuts.”

Why Credit Card Interest Rates Stay High

While the Federal Reserve sets the rate banks use when lending money to each other, this does not directly translate into lower credit card interest rates. Credit card issuers often add three percentage points to the Fed’s rate to determine the Prime Rate, which is the starting point for determining a consumer’s annual percentage rate (APR).

"Each lender sets their own rates based on factors like your credit score, payment history, and overall debt," Bulger explained. "If you’re paying 22% APR today, the recent Fed rate cut may only drop it to 21.5%. Over-limit balances or missed payments, triggering what’s known as a ‘penalty rate’, may prevent any rate reduction at all."

The Lag Between Fed Rate Cuts and Credit Card Rates

Many consumers are surprised that their credit card interest remains unchanged even after the Fed cuts rates. Bulger points out that there is often a lag between the Fed's decision and any noticeable change in credit card interest rates.

"If you don’t see a change in about 45 days, it may be due to other factors, like your outstanding balance or credit history," said Bulger. “While credit card interest rates rise along with interest rate increases from the Fed, they typically don’t follow the Fed downward as quickly.”

Credit Card Debt on the Rise

According to the MMI Consumer Distress Dashboard, the average credit card debt balance among new MMI clients has risen by 31% since 2022. At the same time, new clients are ending each month with a household budget deficit that has grown by 74% during the same period. 

"We talk to consumers every day whose lives are held back by credit card debt," said Bulger. "Their financial goals, from saving for a home to taking a family vacation, are put on hold because of their debt. It doesn’t have to be that way, and we’re here to help them find a path forward."

About MMI

Money Management International (MMI) has been at the forefront of financial health solutions for over 65 years. As a leading nonprofit organization, MMI is dedicated to changing how America overcomes financial challenges by delivering timely and expert guidance. Recognized by major financial organizations and media outlets, MMI’s programs help individuals reach their financial goals and foster a life of financial wellness. Learn more at MoneyManagement.org.

For reporters looking to interview real people for stories, MMI has created a group of nearly 500 clients from across the country who are willing to share their experiences with the media in the hopes of helping others challenged with debt. Our peer advocates have paid off over $19 million of debt and now serve as MMI ambassadors. Hear from them on MMI’s podcast, Long Story $hort. 

To schedule an interview with Kate Bulger or an MMI client, please contact:

Thomas Nitzsche, 404.490.2227, Thomas.Nitzsche@MoneyManagement.org 

Lori Geary, 404.551.2151, lgeary@lexiconstrategies.com

Thomas Nitzsche
                    Money Management International
                    404.490.2227
                    Thomas.Nitzsche@MoneyManagement.org
                    
                    Lori Geary
                    Lexicon Strategies
                    404.551.2151
                    lgeary@lexiconstrategies.com