Variable-rate cards likely to drop

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When the Federal Reserve meets and changes rates we all have questions: What does it mean to me? Is my credit card company going to sock me with another rate increase? Bankrate is here to help. We’ve looked at five categories — mortgages, home equity loans, auto loans, credit cards and certificates of deposit — to determine if the Fed’s moves made you a winner or a loser. Here’s a look at credit cards:

 Winner: Credit card debtor
In a surprise move, the Federal Open Market Committee reduced the federal funds target rate. It cut the target rate by 75 basis points, which brings the federal funds rate down from 4.25 percent to 3.5 percent. This reduction will trigger the prime, which is usually 3 percentage points higher, to drop from 7.25 percent to 6.5 percent.

Because most variable-rate credit cards are based on the prime rate, consumers with variable-rate cards may see their APRs decline. Cardholders may see some rate relief in their February payments, says Tony Plath, associate professor of finance at the University of North Carolina.

Plath says fixed-rate cardholders are not likely to see their APRs dip as a result of the FOMC’s actions.

Another professor argues that credit cardholders may not see their rates decline because the banks have tightened their credit standards.

“The banks have suffered large increases in defaults, there have been large increases in foreclosures in the mortgage market and bank lending is more carefully scrutinized now by both the regulators and the banks themselves,” says Harold A. Black, the James F. Smith Jr. Professor of Financial Institutions at the University of Tennessee, Knoxville.

“I actually think that even though under typical times the Fed lowering those short-term rates would eventually start to bring down credit card rates, it may not be as pronounced in this market simply because of what’s going on as far as credit standards are concerned.”

 Take action
Regardless of whether this rate cut translates to a lower monthly payment for you, a credit card issuer can change your interest rate at any time, with 15 days advance written notice. Reduce your balances as much as possible or pay them off and you’ll save more money than you would with a rate cut.