How a card’s rate is set
Most credit cards have a variable annual percentage rate (APR): the prime rate plus a margin the issuer chooses. The prime rate is set by banks, and by long-standing convention it is 3 percentage points above the top of the Fed’s target range.
So with the Fed at 3.75%–4.00%, the top of the range is 4.00% and the prime rate is 7.00%. When the Fed moves, prime moves by the same amount, usually within days, and a variable card APR follows at the next billing cycle or two. Your card agreement says exactly when.
What a quarter-point cut does to a balance
Take a balance of 5,000 at 24% APR, paid at 200 a month. It takes 36 months and about 2,001 in interest to clear. If a 25 basis point cut took the APR to 23.75%, the same payment clears it in 35 months for about 1,968 in interest: 33 less. A quarter point matters little on a card at this level; paying the balance down matters far more. Test your own figures in the calculator.
What a cut does not do
It does not change a promotional or fixed-rate card, or a balance-transfer rate, until that period ends. It does not make a high margin low: a card priced far above prime stays expensive after a cut. And issuers may pass on a cut more slowly than they passed on a hike; the pass-through depends on the card.
In short
Fed cuts help variable-rate card holders a little and slowly. This is general information, not advice. Check your own loan or card agreement for how and when your rate changes.
More explainers
- Does the Fed set mortgage rates?
- Fed funds rate vs prime rate: what is the difference?
- What happens when the Fed raises or cuts rates
- The rate cut calculator
Questions
How fast does a Fed cut lower my credit card rate?
The prime rate changes within days of a Fed move, and a variable card APR then resets at the next billing cycle or two, as your card agreement describes.
What is the prime rate now?
7.00%, by convention 3 percentage points above the top of the Fed’s target range (3.75%–4.00%). Banks set it, so it can in principle differ; it has followed this rule through every recent change.
Will a 0.25% cut save me much on my card?
Little: on a 5,000 balance at 24% paid at 200 a month, a quarter-point cut saves about 33 in interest over the payoff.
Does a Fed hike raise my card rate?
On a variable-rate card, yes, in the same way and at about the same pace as a cut lowers it.