There is a growing consensus that the Federal Reserve will cut interest rates this week even though the federal funds rate is already sitting at a 45-year low. Unfortunately, the impact of a prime rate cut on credit card interest rates will be minimal. Zero percent intro offers may expand among smaller issuers, and existing zero rates offered by major issuers could be extended to longer periods. Some issuers, such as Fleet Bank, have already extended their 0% rates until September 2004. But, the majority of on-going interest rates, or the rates that apply after the introductory period, are now subject to minimum rates or floor rates. Therefore, many credit card rates will be unaffected by any future rate cuts. The reality is that credit card interest rates have actually been rising over the past year as punitive interest rates (up to 30%) are assessed on more accounts. Bank credit card debt (excluding store and gas credit cards) at the end of the first quarter was $645.6 billion, compared to $660.9 billion at the end of 2002. About 80% of this debt accrues finance charges. This means Americans are currently shelling out about $77 billion in credit card interest annually. If a 25 basis point cut in the prime rate were fully passed on to consumers it would save about $1.3 billion in annual interest costs. In the current market consumers will be lucky to see more than $300 million in annual savings.
Average Credit Card Interest Rates Jan 01: 16.49% May 01: 15.83% Jan 02: 14.33% May 02: 14.60% Jan 03: 14.81% May 03: 14.94% Source: CardTrak (www.cardtrakcomstg.wpengine.com)