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Fed News   Fed announcement: June 24, 2009

Winner or loser: Credit cards
 

Winner: Credit card debtor
When the rate-setting Federal Open Market Committee (FOMC)

Federal Open Market Committee (FOMC)

The FOMC consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
changes the federal funds target rate
Federal funds target rate

The short-term interest rate that banks charge other banks to borrow money overnight at the Federal Reserve. The actual rate, or effective rate, changes daily and may be above or below the targeted rate. The FOMC sets the rate at its regularly scheduled meetings but may opt to change it between meetings should economic conditions warrant a change.
, this in turn affects the Wall Street Journal prime rate
Prime rate

The interest rate banks charge their best customers, meaning businesses. It is almost always 3 percent above the federal funds target rate. Banks set this rate based on loan demand and other factors.
, which is usually 3 percentage points higher than the former.

The prime rate affects the interest rates on most variable-rate credit cards. If the Fed cuts rates, the prime rate will drop accordingly the following day and variable-rate cardholders will enjoy a lower interest rate after their issuer reprices rates, which can mean a lag time of up to three months.

In this case, the Fed has cut rates by 50 basis points, or .5 percentage points. That puts the federal funds rate at 4.75 percent and the prime rate at 7.75 percent, down from 8.25 percent. That means that soon variable-rate cardholders will pay a slightly lower interest rate.

Fixed-rate cardholders may or may not feel a difference. While their rates should stay put, card companies can always adjust the rate with 15 days' advance written notice to the consumer.

Credit cards

Historical perspective
This is the first time the Fed has sliced the federal funds rate since August 2006. The rate has stuck to 5.25 percent after rising a quarter point for 17 meetings in a row.

Accordingly, interest rates on all cards -- standard, gold and platinum -- both fixed and variable have remained relatively flat for nearly a year. Currently, the standard fixed-rate is 13.48 percent and the standard-variable rate is 14.57 percent. The fixed rate for all cards dipped to 11.85 percent while the variable rate increased to13.97 percent.

Smart strategies
Shop around. No matter what's going on with rates, check out the commission to make sure you're getting the best deal and not paying more in fees and interest.

Always pay more than the minimum, if possible, and send payments on time to avoid late fees, rate increases and a lower credit score. Work at paying your balances off, and in the future, try to keep balances low enough so you can pay them off each month to avoid paying interest altogether and accumulating expensive credit card debt.

Take action
Figure out how long it will take you to pay off your credit card balance by using our payment calculator.

Compare credit card offers here.

Create a news alert for "Federal Reserve"  -- Posted: Sept. 18, 2007
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