At the end of July 2019, the Federal Reserve announced that they would be lowering the federal funds rate from 2.25% to 2.0%. Whether you’re saving or paying off debt, the new Federal Reserve rate will influence your approach. This is the first time that the Fed has lowered the federal funds rate since the Great Recession. The rationale behind lowering the federal reserve rate is to encourage consumers to take out more loans and buy more because it is essentially cheaper to borrow and carry debt. Despite the small drop, the change in rate can have a big impact on your finances.
Banks, lenders and even credit card companies determine the interest rates that they offer based on what the Federal Reserve does. Therefore, despite personal factors like credit history, the federal funds rate plays a significant role in your personal interest rate.
Credit cards either have a fixed or variable rate. A fixed rate is like not to change under a rate-cut. Credit cards that have a variable rate are linked to the Federal Reserve’s benchmark rate. Eventually, these interest rates should drop by the same quarter percentage as the Federal Reserve interest rate.
However, it is important to acknowledge that credit card issuers often have hidden statements in their agreements, allowing the highest prime rate in effect during the preceding 60-day period. Even if your rate is fixed, credit card companies can change their interest rates whenever, as long as they provide notification in advance.
According to Bankrate.com, credit card rates now stand at a record high of 17.85%, on average and almost half of all cardholders do not pay their credit card bill in full each month. Therefore, a lower monthly credit card rate should be beneficial to many. Another option for those trying to eliminate debt is to shop around for zero-interest balance transfer offer so that you can more quickly pay off your credit card debt. Cardholders can also directly reach out to their issuer to request a break on interest rates.
Overall, credit card holders should expect to see lower monthly payments over time under the new federal rate cut, making now the perfect time to attempt to pay off credit card debt.