Finally, the Federal Reserve appears ready to cut interest rates in September.
Credit card users across the country suffering from mounting debt can breathe a sigh of relief. The current high interest rate environment—rates are at 5.25% to 5.50%, a more than 20-year high—has only increased the cost of their credit card debt.
Look no further than this snapshot of federal interest rate data:
But the Fed’s decisions alone may not provide you with the relief you seek. After all, many factors affect debt. Even if the Fed does, you shouldn’t wait to start paying off debt.
What do lower interest rates mean for your credit cards?
Credit card interest rates can change—after all, many credit card APRs vary over time. But don’t count on lower Fed rates to make a big difference in your .
A single cut would likely only move the needle 25 basis points. Even if the Fed makes a 50 basis point cut, the fed funds rate would only rise 0.50% to a target of 4.75%-5.00%.
For credit cards with an effective annual interest rate of 25% or 30%, this should not have a major impact.
Consider, for example, the Fed’s last rate cut. In February 2020, before two sharp rate cuts at the start of the pandemic, the rate was 15.09%. By May of this year – when benchmark rates were near zero – average credit card rates only dropped to 14.52%. They remained at that level until rate hikes began again in early 2022. As of May 2024, the average is 21.51%.
While credit card interest rates may drop slightly when federal interest rates are cut, the difference for the cardholder may be minimal.
Add to that the widening gap between federal funds rates and credit card companies’ interest rates – another factor that could keep your APR high regardless of the Fed’s decisions.
The APR margin between credit card interest rates and the federal funds rate (based on the Fed’s target rate) has skyrocketed since the Fed last cut interest rates in 2020. Today.
What to do if the interest rate is lower?
You can always find your amount through your online account or on your monthly credit card statement. If it isn’t automatically reduced, you may even be able to get it lowered – although there’s no guarantee that this will happen, you may have a better chance if you’ve improved your credit score or increased your income since applying for the card.
Remember: Lower interest rates are not a reason to… You may find that your required minimum payment goes down because a lower interest rate means less interest accrues each day. But if you only pay that amount, your debt may grow each month.
Instead, you’ll be much better off taking action now to pay off your credit card debt.
How to pay off credit card debt
Don’t wait until you can pay off your credit card debt. Here are some options to consider today:
Use a balance transfer
You may qualify for one. These cards offer an introductory interest rate of 0% on your transferred balances. Today, introductory periods usually range from 12 to 21 months.
When you make a transfer, expect to pay a fee for the transfer. These fees can range from 3% to 5% of your total balance. For a $5,000 balance, that could be as much as $250. But don’t let that stop you from making a transfer—the fee is still much less than the thousands you could otherwise pay in interest.
Here are some of the ones available today. Some even offer rewards that you can continue to earn even after you pay off your debt.
Increase your payments
If you’re only making the minimum payments on your credit card debt, now is the time to contribute as much as you can toward paying off the debt. You could be left with mounting debt for years with no end in sight. Even if you can pay just a few dollars more than the minimum each month, you’ll pay off the debt faster.
For example, say you have a $5,000 balance on a card with a 21% APR (calculated as 1% of the balance plus accrued interest), it could take you more than 23 years to pay off the balance in full. If you could instead put $200 toward the debt each month, you could pay it off in a much more manageable 37 months.
Try the snowball or avalanche method, or focus on making multiple monthly payments if that helps you reach your minimum.
Do not add to existing balance
This may be the most obvious step, but one of the hardest to implement: As you work to pay off your debt, try to stop spending on the card and increasing your balance.
You may lose some of the rewards points and miles you’d otherwise earn, but it may be a good idea to switch to a debit card or cash if you tend to overspend on credit. Those rewards aren’t worth nearly as much as you’ll spend paying off interest and amounts you can’t afford.
Consider nonprofit credit counseling
If you’re really struggling with your money never going away, you may want to seek credit counseling. A credit counselor can help you develop a realistic plan for your spending, manage existing debt, or even develop a debt settlement plan. This can be especially useful if you don’t have the funds to take advantage of tools like a 0% APR card.
To get started, you can learn more about credit counseling through the or contact nonprofit credit counseling organizations such as the or the.
This article was edited by Rebecca McCracken
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