Credit Card APRs Start to Sink as Banks Respond to Emergency Fed Actions
Economic turbulence driven by COVID-19 leads to aggressive interest rate cuts
The financial impact of the coronavirus (COVID-19) is trickling down to credit cards after the Federal Reserve lowered its benchmark interest rate twice in less than three weeks.
The Fed’s rate indirectly drives the APR of most credit cards, which means card APRs have gone down, and more will soon follow suit. Here’s more about what has happened, and what it means for the credit cards in your wallet—and any card debt you’re carrying right now.
The Federal Reserve made its latest rate cut on Sunday, March 15, 2020, bringing its benchmark interest rate (more specifically, the federal funds rate) down 1 percentage point to a 0%-0.25% range to help counter economic disruption caused by the snowballing impacts of COVID-19 across the U.S.
“It took people by surprise because it was really the first big financial policy action by the government against the virus,” explained Richard Grossman, professor and economics department chair for Wesleyan University. “The administration had been saying that the virus was ‘no big deal,’ which was a huge mistake. Once the magnitude of the economic costs began to emerge, the Fed decided it had to act right away.”
The Federal Open Market Committee, the group that oversees the important interest rate-driving figure, was expected to lower rates later in the week after a routine committee meeting, but the rapidly evolving state of affairs led to an early announcement to help companies in a tough financial spot.
“The rate cuts are not aimed directly at consumers,” Grossman said. “The goal is to make relatively cheap credit available to firms that are short of cash. So, for example, firms that are having trouble paying their suppliers, creditors, and workers should be able to get cash to pay their bills.”
The surprise Sunday announcement was the second emergency rate cut made in March. The Fed surprised consumers and economists by first lowering its benchmark rate by half a percentage point March 3, which brought the target rate down to 1.00%-1.25%. The Fed last made emergency rate cuts in December 2008, during the height of the Great Recession. In late 2015, the Fed started slowly increasing its rate as the economy recovered, and in mid-2019, the Fed reversed course. Then COVID-19 hit, and the Fed made bigger and more frequent cuts.
Now that it’s so low, the federal funds rate will likely hold steady for some time (though pushing rates to negative territory is an option). “I think that the virus is going to have a substantial negative effect on the economy for some time and would expect that interest rates will not start back up until policymakers feel like the economy is on the rebound,” Grossman said. “But with the Treasury now proposing $1 trillion in stimulative spending, I don’t think that rebound is coming soon.”
What This Means for Credit Card Interest Rates
Most credit card interest rates are variable, which means they are based on the prime rate, a number driven by the federal funds rate. That means when the Fed changes its rate (up or down), banks follow suit and adjust credit card APRs accordingly.
The Balance is closely watching the APRs of more than 300 cards for changes following the latest Fed announcements. As of publication date, these are the variable APR cuts made based on the Fed and prime rate changes since March 3, 2020:
If you’re shopping for a new card, the rates you see advertised are likely to be lower soon—if they aren’t already. If you’re an existing cardholder, watch your monthly statement or online account to see if your APR goes down. Card issuers aren’t required to notify you ahead of time of changes driven by an index, such as the prime rate.
It will likely take 1-2 months for cardholders to see the latest rate changes impact their accounts, according to Jeremy Lark, senior manager of client services for GreenPath Financial Wellness. a nonprofit financial counseling agency.
What This Means for Your Credit Card Debt
If you pay off your credit card(s) in full each month, rate cuts don’t impact you at all. The cost of using your card has not changed. However, if you’re someone who already does or will soon carry a balance, when the Fed cuts its rate and credit card interest rates go down, so will the cost of your debt—but not by much.
“For consumers that carry a large balance and only make minimum payments, this interest reduction will help slightly but it’s not going to be a game changer,” Lark said in an email. “For those with an average amount of credit card debt it might mean a few hundred dollars saved over the course of the debt repayment, but not a big cash flow change.”
Bottomline: Credit Card Debt Is Still Expensive
Interest rates in general are low right now, but that’s not a reason to spend more or care less about lingering credit card balances—the average credit card interest rate is still above 20%, according to The Balance’s rate report. If anything, this tiny break in interest costs should be an incentive to pay down credit card debt and focus on using credit responsibly during these uncertain times.
Federal Reserve. "Open Market Operations." Accessed May 6, 2020.
Federal Reserve. "Federal Reserve issues FOMC statement." Accessed May 6, 2020.
CFPB. "I noticed that the interest rate on my card went up last month without any notice. Can they do that?" Accessed May 6, 2020.