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Putting credit card rates in motion
The majority of credit cards charge variable interest rates tied to an index, usually the prime rate, which is about 3 percentage points above the federal funds rate. When the federal funds rate changes, the prime rate does as well, and credit card rates follow suit.
"What the Federal Reserve does normally affects short-term interest rates, so that affects the rates that people pay on credit cards," Faucher says.
When the Fed sets a low rate, you are encouraged to borrow to buy a new appliance, make home repairs or conduct similar purchases that stimulate the economy. Of course, the annual percentage rate you pay on your credit card can rise for other reasons, such as late payments or the end of a low introductory rate.
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