The finance world is abuzz with news from Wednesday’s Federal Reserve meeting. For the first time since March 2020, the Fed cut interest rates. The federal funds rate is now 4.75% to 5% after being at a 23-year high of 5.25% to 5.5% since July 2023.
Originally expected to cut 0.25 of a percentage point, the Fed instead cut rates by 0.5. This is all well and good, but what does it mean for you and your credit card debt? I’m glad you asked.
What Credit Card Consumers Can Expect
Unfortunately, the answer is “not much.” Consumers won’t see a difference in annual percentage rates right away, though APRs could inch down in a few weeks. But even then, just one rate cut won’t cause a huge dent. The average APR offered on a new credit card right now is 24.92%, so we’ll use that as our example to lay out what a new interest rate means.
Let’s say you have a credit card with a balance of $6,500 and an APR of 24.92%. Assuming you make monthly payments of $250, it will take 38 months to pay off your balance, and you’d pay $2,943 in interest.
With a rate cut of 0.5, your APR would dip to 24.42%. Making the same monthly payments, you would still take 38 months to pay off your balance, but you’d pay $2,846 in interest. The savings is $97.
Consumers should keep an eye on future Fed meetings for additional rate cuts. If interest rates continue to drop as predicted, then consumers will feel a much bigger impact. In the meantime, you should just keep paying your credit card as usual.
[Read: Best Low-Interest Credit Cards.]
What to Do Next
Regardless of predicted additional rate cuts, you should continue to pay (and prioritize) your high-interest credit card debt. There are several tried and true methods you can employ to help eliminate your debt:
— Apply for a balance transfer credit card. If you’re carrying a high balance on a credit card, a balance transfer credit card is a good option. You can cut into your debt while making payments during a card’s 0% introductory APR period, which can last from 12 to 21 months.
— Apply for a debt consolidation loan. You can combine multiple balances into one installment loan. The APRs may be lower on debt consolidation loans than the APRs on your credit cards.
— Use the debt avalanche method. With this method, you pay off your credit card balances from the highest APR to the lowest. The only drawback, though, is if you have a high balance, it could take a long time to pay off that first credit card.
— Use the debt snowball method. With the debt snowball method, you pay off your credit card debts in order from smallest to largest.
The Fed has two more meetings in 2024: in November and December. This means rates might be lower in 2025, but don’t put all your eggs in this one basket. If you’re hoping these rate cuts will ease the burden of your credit card debt, you might be hoping for a while.
More from U.S. News
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What the Fed Rate Cut Means for Credit Cards originally appeared on usnews.com
