On March 3, the Federal Open Markets Committee (FOMC) made an emergency cut to interest rates in response to fluctuations in the market caused by COVID-19. Unease continues to grow as the novel coronavirus and its effects continue to dominate the news cycle. How does this cut to the benchmark interest rate affect consumer credit cards?
In the United States, financial institutions have kept a close eye on the economy as infections from the coronavirus begin to spread. As a result, many worry that there will be significant financial consequences in its aftermath, both domestically and globally. A change to the federal interest rate affects how banks evaluate the APRs they issue for credit cards. Therefore, the latest changes will also impact consumers with open credit card accounts.
Emergency Coronavirus Rate Cuts
The Federal Reserve has begun to take precautions and recently slashed interest rates by an additional fifty basis points. In 2019, there were three additional rate cuts unrelated to the coronavirus fears we are experiencing today. The most recent adjustment to the benchmark interest rate currently puts federal interest rates at 1.25% as of this writing.
After announcing the 50-point rate cut, FOMC Chairman Jerome Powell stated,
“We are beginning to see the effects [of coronavirus] on the tourism and travel industries, and we are hearing concerns from industries that rely on global supply chains. My colleagues and I took this action to help the U.S. economy keep strong in the face of new risks to the economic outlook. We do recognize that a rate cut will not reduce the rate of infection… but we do believe that our action will provide a meaningful boost to the economy.”
As the effect of coronavirus on the American economy becomes more apparent, more announcements from the Fed are expected to follow.
How Does a Coronavirus Rate Cut Affect Credit Card Interest?
When the Fed makes a cut to the benchmark interest rate, it affects multiple parts of the financial sector. Consumers can expect to see a change to interest rates for mortgages, loans, savings accounts and credit cards each time it is adjusted.
The prime rate, which is the basis for how credit card issuers determine the APR they assign to cardholders, is directly related to this federal interest rate. The prime rate rises and falls in tandem with federal interest rates. This means that the annual percentage rate for credit cards also will rise or fall, depending on the updated federal rates. A good metaphor is the domino effect: in this case, the Fed lowers the benchmark interest rate by 50 points. The prime rate then decreases to accommodate this change, and once the prime rate adjusts, credit card interest rates follow.
What Do Lower Credit Card Rates Mean for Consumers?
Cardholders can expect to see their interest rates decrease by approximately 0.50%. If your interest rate is 16.74%, for example, it will adjust to 16.24% (if it has not already). This change typically occurs within two billing cycles of an announcement from the Fed.
Consumers whose credit cards already have a low APR will certainly benefit from this rate cut. Many credit unions, and some national card issuers, offer credit cards with APRs that are extremely low when compared to most cards on the market. A low APR credit card is particularly useful for cardholders who carry a balance in between billing cycles. A cut to federal interest rates would mean that an already-low APR would, at least temporarily, be even lower. For most people with credit cards, this is good news.
However, those who hold a high-interest balance may not see significant savings even though their interest rate will also drop. A half-percentage point cut likely will not put a huge dent in the charges that accompany cards like the Citgo Rewards® Card, which boasts a hefty APR of 29.99%. If you hold debt on a card like this one, now is a good time to switch to a balance transfer card. Many balance transfer cards offer a lower interest rate as an incentive to open an account.
Coronavirus and Credit Cards – Our Best Advice:
- If you’re out of work due to a coronavirus quarantine, do not rack up debt using your credit card. Even if interest rates are lowered due to the Fed’s rate cuts, spending beyond your means is an easy trap to fall into. It’s not a good idea to risk digging a financial hole too deep to climb out of.
- Credit union credit cards traditionally have low interest rates. A cut to federal interest rates will drop those rates even lower – great news for anyone planning a big purchase with their credit card. However, there are limitations to who can join a credit union. This is often based on geographic region. If you’d like to take advantage of a low APR, look at the cards offered by the credit unions in your area.
- A balance transfer credit card is a great way to whittle away existing debt while interest rates are lower due to the speculation surrounding COVID-19’s economic impact.