An expert says the Fed's interest rate cut is so 'minuscule' when it comes to credit cards that it saves the average person in debt just $1

Tanza Loudenback

Aug 2, 2019, 00:04 IST

An expert says the Fed's interest rate cut is so 'minuscule' when it comes to credit cards that it saves the average person in debt just $1

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Unfortunately, the Fed's interest rate cut won't be much help to those in credit-card debt.

The Fed reduced its interest rate benchmark by 0.25%, marking the first rate cut in a decade.
Borrowers will soon see interest rates drop slightly on new auto loans, some student loans, personal loans, and home equity lines of credit, but there won't be much relief for those in credit-card debt.
With the median credit-card APR at 21.48%, a quarter-percentage point drop likely won't be felt by many credit-card holders who carry a balance.
One expert recommends those in debt use a balance transfer card to consolidate their balances and pay them off without accruing interest.
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The Federal Reserve announced on Wednesday that it would cut interest rates for the first time in a decade, bringing the target range to between 2% and 2.25%.

This is generally good news for consumers, as it makes borrowing money from banks cheaper. But the savings impact varies from person to person, and it really depends on how exactly you're borrowing.

The Fed cut its benchmark interest rate by 0.25%, which could provide some relief to borrowers looking to refinance or take out a new auto loan, student loan, personal loan, or home equity line of credit. These types of loans typically come with interest rates between 4% and 10%, where a quarter percentage rate reduction is likely to be felt.

Unfortunately, the Fed's interest rate cut won't be much help to those in credit-card debt, according to CreditCards.com industry analyst Ted Rossman.

"If you're carrying a balance at 17.80%, even if that goes down to 17.55%, the relief will be minuscule. The monthly minimum payment on the average balance would go down just $1," Rossman said. When you consider the current median interest rate, or annual percentage rate (APR), on credit cards is 21.48%, the impact for many cardholders in debt could be even smaller. And that's assuming the lender even adjusts their rate.

While many lenders set their prime rate - the interest rate they charge their best customers - in accordance with the Federal funds rate, credit-card companies don't always follow the Fed's lead. "In the past, when the Fed has cut its benchmark rate, the national average credit card APR hasn't decreased by the same amount," writes Creditcards.com's Kelly Dilworth.

"Between 2007 and 2008, for example, the Fed cut its benchmark interest rate, the federal funds rate, by 5 percentage points. But during that same period, the average card APR fell by just over 1 point before climbing steadily over the next two years," Dilworth writes.

There's a much better strategy for paying down debt than counting on the Fed and your bank to lower rates, Rossman said. "Given how high credit-card rates continue to be, it's much more important to pay down your debt ASAP through a balance transfer card, raising your income, or cutting your expenses," he said.

Balance transfer cards allow you to move a balance, or consolidate multiple balances, onto one credit card with a much lower rate or even an introductory 0% APR. This buys you time to pay your debt without accruing a ton of interest, or any at all.

Balance transfer cards do usually command a fee between 3% to 5% of your total balance, so it's important to run the numbers and determine if the upfront fee is worth the amount you'd be saving on interest.