The Federal Reserve is expected to cut interest rates after today's Fed meeting, and if you have credit card debt, you’re probably looking forward to paying less in interest.
It's probably best to temper your expectations, though. Experts say the Fed's changes won't provide substantial relief.
“Credit cards and the Fed rate don’t move in lockstep,” said financial analyst Richard Barrington of Credit Sesame. “While a Fed rate cut is likely to cause most credit card rates to fall, not all of them will fall by the same amount, or even at all.”
Your credit card’s annual percentage rate, or APR, determines how much interest will accrue on your credit card balance. Right now the average credit card APR is over 20%. While a lower APR can help ease some of the interest that accumulates, today's rate cut will likely do very little to help you if you’re struggling with credit card debt.
Why your credit card's interest rate will change
The Federal oversees the federal funds rate -- or the rate banks pay when they borrow money from each other. When the Federal Reserve cuts the federal funds rate, consumer products like loans, savings accounts and credit cards tend to follow suit. With a rate cut expected this week, your credit card issuer may lower your APR slightly in the coming weeks.
However, the drop in rates likely will be minimal because the Fed typically only raises or lowers the federal funds rate a quarter to half a percent at a time. In addition, as Barrington pointed out, issuers are not required to lower APRs, so you may not see your credit card's APR change much, if at all.
Even if the Fed lowers rates by more -- some experts are predicting a 50-basis point cut is likely -- you won't see relief right away.
Can a lower credit card APR help you get out of debt?
Probably not, according to several credit experts. It's too early to expect any rate cuts to help you save money on credit card interest, according to credit expert John Ulzheimer, formerly of FICO and Equifax.
The Fed is expected to cut rates by a quarter or half a point this week. If your credit card issuer decides to follow the Fed's pace, and your current APR is 21%, it'd drop to either 20.75% or 20.5%. This tiny dip won't make a difference in the grand scheme of things. In fact, your minimum monthly payment will likely stay the same.
Even if the cut was more substantial -- say 1% or 2% -- as long as you're continuing to accrue any interest, your credit card debt is likely to grow. But that doesn't mean you're stuck. There are other moves you can make to reduce interest charges and pay off credit card debt faster.
Tips for paying off your credit card, regardless of interest rate
Don't wait for interest rates to drop significantly before you start tackling your credit card debt. Here are a few ways to get out of debt now
A balance transfer offer
Your best shot at getting a lower interest rate is to go for a balance transfer offer, according to credit expert Gerri Detweiler.
The best balance transfer credit cards also offer an introductory 0% balance transfer APR. These offers can help you avoid interest completely as you pay off the debt over 12 to 21 months, although upfront balance transfer fees may apply.
As an example, the Citi Simplicity® Card* offers a 0% intro balance transfer APR for 21 months (then 19.24% to 29.99% variable). It has an introductory balance transfer fee of 3% or $5, whichever is greater, for balances transfers in the first four months -- the fee then increases to 5% or $5, whichever is greater.
If you were to transfer a $5,000 balance using that offer, the transfer fee would be $150 . That's a small amount compared to the interest charges you'd deal with leaving that balance on a card with a 20% APR.
Try the debt avalanche method
Financial attorney Leslie Tayne recommends using the debt avalanche method, where you pay as much as you can toward your debt with the highest interest rate each month while making minimum payments on the rest. Once the debt with the highest interest is paid off, you put all that money toward wiping out the next debt and so on.
Consider a personal loan
If you're struggling with high APRs and need to lower your monthly payments, a personal loan might offer more breathing room into your budget. You'll be able to lock in a fixed interest rate, and personal loans tend to have lower APRs than credit cards. You'll also be able to pick a repayment timeline that fits your needs.
You might end up paying more in interest over the long-term, but if you need a lower monthly payment, it's worth considering.
Talk to a trustworthy credit counselor
If you're struggling to come up with a way to pay off your credit cards, consider reaching out to a credit counseling agency, which may be able to set you up with a debt management plan that's within your budget, or other debt relief services. Find a reputable company through the National Foundation for Credit Counseling, a nonprofit that can connect you with certified agencies that can help you review your financial goals.
*All information about the Citi Simplicity Card has been collected independently by CNET and has not been reviewed by the issuer.
