Impact of Rate Cuts on Credit Cards
Recent Federal Reserve action is having a positive impact…
Recent Federal Reserve rate cuts are having a positive impact on the terms offered by most major U.S. credit card issuers. According to the Synovate Mail Monitor, the ongoing interest rate that takes effect after an introductory or promotional rate ends dropped from 12.94% to 12.51% (on average) in the third quarter of 2007. Of course, this doesn’t take into account the most recent Federal Reserve rate cuts, but it’s a good sign of things to come.
“The 50 point reduction of the Prime Rate in September had an immediate impact on credit card offers” said Andrew Davidson, Vice President of Competitive Tracking Services for Synovate’s Financial Services Group. “Issuers began to promote lower rates but fixed them in anticipation of further cuts in the future” he added.
Discover, in particular, has embraced this new strategy by mailing offers that are now almost exclusively fixed. This is a complete reversal to what we saw last year when all Discover Card offers were variable. Discover introduced an 8.99% fixed rate offer in October while Chase and Bank of America mailings continued to promote fixed rates as low as 7.99%. Although most of these offers have yet to be offered online, it’s likely the trend will continue and more fixed rate offers will become available. Currently, the lowest fixed rate offers are from First National Bank of Omaha (5.99%) and Pulaski Bank (6.50%).
But be aware: a fixed rate may / or may not be the best choice in this environment. For cardholders who continue to use variable rate credit cards, it’s likely rates will continue to fall following the most recent Fed actions: a huge 75 point cut on January 22nd - quickly followed by another 50 point cut last week. If rates continue to drop as expected, a fixed rate credit card won’t follow the ongoing downtrend. Not to mention, a credit card issuer can raise a ‘fixed rate’ any time they choose - as long as they provide prior written notice.
No matter which type of offer you choose, interest rate cuts are great for consumers. Whether you lock in a low fixed rate - or take advantage of decreasing variable rates - you should see a drastic reduction in interest charges over the coming months. If you don’t see an impact, it might time to shop around consider a new offer. Credit card companies will compete for your business - especially if you have excellent credit - so make sure you take advantage.
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