Does Rate Cut Equal Lower Credit Card Bills?
November 7, 2007
When the Federal Reserve cut the interest rate by another quarter point recently, many consumers wondered how that cut might affect their credit card rates. It is a reasonable thought. If banks are paying less for money, then they should charge less for borrowing money. Right?
Well, maybe not.
David Wyss, chief economist for Standard and Poor’s, broke the bad news to consumers recently. “For the average consumer, there’s a lot of confusion over interest-rate moves. Interest rates on credit cards move very slowly and some of them don’t move at all.”
It is true that about 57 percent of credit card issuers have their own interest rates firmly tied to the prime rate which should mean that consumers holding those cards should eventually see some relief through lower rates as well but that is going to take time.
Why? Call it credit rate lag for lack of a better term. The problem is with what is called the rate reset cycle. For example, if your card issuer resets the interest rate that it charges right after the Fed drop, then you may see a lower bill in the next billing cycle. Some issuers, however, do not reset that often, and you will have to wait until they do before you see a lower bill.
While many companies will reset their rates on a monthly basis, some card companies only do it quarterly or semi-annually. A few will only do it annually