Think a Fed Rate Cut Will Lower Your Credit Card APR? Not So Fast

Set by the Federal Reserve’s Federal Open Market Committee (FOMC), the federal funds rate is what one bank can charge another for an overnight loan. This rate has rightfully come to be known as a guiding light for interest rates across the financial sector.

But when it comes to credit card interest rates, the federal funds rate isn’t the only influence at play. Banks also tend to factor the prime rate into the mix, as well as their own lending policies and markups to account for risk. Together, these elements determine your APR—and that’s why a drop in the federal funds rate won’t necessarily lead to a lower credit card interest rate.

How Credit Card APRs Are Set—The Role of the Prime Rate & Spread

Credit card APRs are essentially based on the federal funds rate, but it’s more of an indirect influence. 

Your APR usually starts with an index, which is often the bank’s prime rate. The prime rate is the interest rate the bank is willing to charge its most creditworthy borrowers. It usually lands around 3 percentage points higher than the federal funds rate.

While the index your bank chooses serves as the “starting point” for your credit card APR, issuers generally add a markup known as spread or margin, which helps banks account for the risk of lending and other costs.

Margin usually takes the form of a range. As an example, your cardmember terms may state that purchase APR is based on the prime rate plus 10.49% to 20.49%. Tack those percentages on to a prime rate of 7.25%, based on the new federal funds rate, and you’d get a final APR range of 17.74% to 27.74%.

Policies for establishing APRs can vary by issuer and by interest type (like purchase APR vs. cash advance APR), so it’s important to check your cardmember agreement if you’re seeking APR-related information specific to your credit card. 

Why a Fed Rate Cut Won’t Automatically Lower Your APR

A cut to the fed funds rate will have a ripple effect on most financial products with variable interest rates. The severity of this impact and how long it takes to appear, however, can vary.

If you have a standard variable APR credit card, there’s a good chance you’ll see an adjustment at some point after the federal funds rate changes, possibly as soon as the next billing cycle.

Not always, though. Cardmember agreements for variable-rate products like credit cards, as well as related legal regulations, often grant issuers a good deal of leeway with interest rate adjustments. In some cases, they may not be required to adjust interest rates at all.

There are also situations where your credit card may have a fixed interest rate that’s not impacted by federal rate adjustments. For example, you may have a credit card with a promotional offer, such as a 0% purchase APR that remains fixed for a set amount of time.

What to Expect From Your Credit Card APR After a Federal Funds Rate Cut

All told, if your credit is in good shape and your credit card has a variable rate, you may see a very slight reduction in your interest rate across APR types (purchase APR, balance transfer APR, etc.). The fed funds rate was only cut by 0.25%, though, so keep in mind that this difference will likely be minimal.

You might not get notice if your variable credit card APR changes due to the prime rate, since this policy is baked into most card agreements.

Curious to know how the federal rate cut will impact your APR? You have a couple of options.

• Check your credit card agreement: There, you can confirm whether your APR is variable, and you should be able to find your issuer’s margin (spread), too—the amount they’re adding on to their preferred index to end up at your final APR.

• Monitor your statements and credit card app: To see how your APR changes, monitor your credit card app or online banking portal. Your APR should always be available for viewing.

What You Can Do to Relieve Your Credit Card Debt

If you’re hoping a cut to the federal funds rate means you’ll pay less interest on your credit card balance, keep in mind that its effect might be negligible. Fortunately, there are other ways to save on interest that you may find helpful.

Transfer a Balance

Several issuers offer credit cards with 0% balance transfer APRs for a set period of time. These cards give you some temporary freedom from the extremely high interest rates credit cards normally charge, possibly giving you a chance to pay your balance down faster. 

Consolidate Your Debt

You can consolidate several debts with a balance transfer credit card or with other financial products, like loans and lines of credit. If you have access to credit with a low interest rate, consolidating all your debts under one umbrella can help you slash the interest you pay over time.

Negotiate With Your Issuer

It may sound like a long shot, but issuers may be willing to negotiate a lower credit card interest rate. Having a pristine credit profile might boost your odds of success. Or, if you’re dealing with tough circumstances, you can explain the situation to the issuer, too. Just call the credit card company and have a conversation about what can be done.

The Bottom Line

In the end: Yes, there’s a fair chance that the Federal Reserve’s recent rate cut will, to some degree, impact your credit card’s APR. The impact is unlikely to be significant, however, and may never appear at all. Looking for a lower interest rate ASAP? You’re likely better off seeking relief elsewhere.