What credit card users need to know about the Fed’s December rate cut

The Federal Reserve has made its third consecutive rate cut since September.

During the The Federal Open Market Committee (FOMC) session on December 18, 2024, the Fed lowered its target federal funds rate range by 25 basis points (a quarter percentage point). That brings the current target to 4.25%-4.50%, down a full percentage point since the Fed began cutting rates earlier this year.

Throughout the high rate environment of the past couple years, the cost of credit card debt has greatly increased for some Americans:

But falling federal interest rates may not offer the relief you’re looking for. After all, plenty of factors influence your credit card’s interest rate. Despite the most recent rate cut — and any further cuts the Fed makes in 2025 — you shouldn’t wait to begin paying down debt.

Credit card interest rates could change when the Federal Reserve lowers the federal funds rate, since many credit card APRs are variable and move over time. But don’t count on lower interest rates to make a significant difference in your credit card interest charges.

Even with the Fed’s recent rate cuts, credit cards with APRs near 25% or 30% are likely to remain unaffected.

Related: What is APR on a credit card?

Consider, for example, the last time the Fed cut the federal funds rate. In February 2020, the federal funds target rate was 1.50%–1.75%, and the average credit card interest rate was 15.09%. By May, the US central bank had cut rates to a target 0.00%–0.25%, a drop of 150 basis points, to support the economy during the Covid 19 pandemic. But, average credit card rates fell only about half a point to 14.52%. They remained around there until rate hikes started again in early 2022. As of August 2024, the average credit card rate is 21.76%.

What’s more, there’s a growing gap between the banking industry’s benchmark rate, the so-called prime rate at which banks lend to their best customers, and the rates credit card companies charge — another factor that could keep your credit card APR high regardless of the Fed’s decisions.

The APR margin between credit card interest rates and the prime rate, which banks usually set about three percentage points above the federal funds rate, has skyrocketed since the last time the federal funds rate was cut in 2020. In February of 2024, APR margins hit an all-time high.

So, while credit card interest rates may dip slightly when federal funds rate cuts occur, the difference for cardholders can be minimal.

You can always find your current APR through your online account or on your monthly credit card statement. If your credit card APR isn’t automatically lowered, you can ask your issuer for a lower APR — while there’s no guarantee, you may have a better chance if you’ve improved your credit score or increased your income since you applied for the card.

Just remember: A lower interest rate isn’t a reason to make only minimum payments. You may see your required minimum payment decrease because a lower interest rate means fewer interest charges can accrue daily. But paying only that amount can leave you with mounting debt balances each month.

Read more about how to avoid paying interest on your credit card.

Instead of waiting for additional relief from the Fed, you’ll be much better off taking action to clear your credit card debt now.

Don’t wait to get ahead of your credit card debt. These are some options to consider today:

You may qualify for a balance transfer credit card if you have a solid credit score. These cards carry an introductory 0% APR on your transferred balances. Today, intro periods typically range from 12 to 21 months.

When you transfer your balance to the new card, you should be prepared to pay a balance transfer fee. These fees can set you back around 3% to 5% of your total balance. On a balance of $5,000, that could be as much as $250. Don’t let that dissuade you from a balance transfer though — the fee is still much less than the thousands you could otherwise pay in interest.

Here are a few of the best balance transfer credit cards available today. Some even offer rewards you can continue to earn after you pay down your debt.

• U.S. Bank Visa® Platinum Card: 0% APR for 21 billing cycles on new purchases and balance transfers (17.99%-28.99% variable APR after that)

• Capital One Quicksilver Cash Rewards Credit Card: 0% APR for 15 months on new purchases and balance transfer (19.49% – 29.49% variable APR after that)

• Chase Freedom Unlimited®: 0% APR for 15 months on new purchases and balance transfers (19.74%-28.49% variable APR after that)

• Citi Double Cash® Card: 0% APR for 18 months on balance transfers (18.49%-28.49% variable APR after that)

Read more: The best balance transfer credit cards

If you’re only making minimum payments toward your credit card balances, now is the time to start putting as much as you can toward paying down your debt. Minimum payments can leave you with mounting debt balances for years and no end in sight. Even if you can only pay a few dollars more than the minimum each month, you’ll start to chip away at the debt more quickly.

Say you have a $5,000 balance on a card with a 21% APR. With minimum payments (calculated as 1% of the balance plus accrued interest), it could take you more than 23 years to pay the balance in full. If, instead, you could dedicate $200 toward the debt each month, you could pay it off in a much more manageable 37 months.

Try implementing debt payoff strategies like the snowball or avalanche method, or focus on making multiple monthly payments if it helps you get ahead of your minimum.

It may be the most obvious move, but one of the toughest to implement: If you’re working on paying down debt, try not to spend more on your card and increase your balances.

You might forfeit some rewards value from the points and miles you would otherwise earn, but it can be a good idea to switch to a debit card or cash if you have a tendency to overspend using credit. Those rewards are not worth nearly as much as you’ll spend paying down interest charges and balances you can’t afford.

If you’re really struggling with long-term debt that never seems to go down, you may want to look into credit counseling. A credit counselor can help you develop a realistic budget for your spending, manage existing debts, or even develop a debt management plan. This can be especially useful if you don’t have the great credit score required to take advantage of tools like a 0% APR card.

To get started, you can learn more about credit counseling through the Consumer Financial Protection Bureau, or look into nonprofit credit counseling organizations like the National Foundation for Credit Counseling or the Financial Counseling Association of America.

This article was edited by Rebecca McCracken

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