Consumer Payment Card News

Rate Lag

Interest rate cuts are not filtering down to cardholders due to floor rates, fixed rates, and rates that are adjusted quarterly. While the prime rate has already fallen 275 basis points this year, credit card rates have only dropped by 104 basis points since January. Some credit card issuers adjust variable rates quarterly, therefore yesterday’s rate cut and the prior two cuts will not be passed on to some consumers till July. Others have instituted floor or minimum interest rates that have been or will be triggered by the drop in the prime rate. The most significant factor creating the lag between the rate cuts and credit card rates, is the widening use of fixed interest rates. Nearly all major issuers of bank credit cards have migrated toward fixed credit card rates over the past two years. Since the first of this year the Fed rate cuts have reduced overall credit card interest costs for consumers by $6.5 billion annually or an average of ($80) annually per U.S. household with credit cards. American consumers currently owe $666 billion on all credit cards. About $568 billion of this debt is owed on major cards such as VISA, MasterCard, American Express and Discover. Approximately $98 billion is owed on retail or store credit cards. Nearly half of all credit cards in the U.S. have variable interest rates. Three years ago, about three-quarters of credit cards had variable rates. About 25% of credit cards have floor rates.

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