Why haven’t credit card rates come down more?
The Fed has cut rates by a full percentage point (100 basis points) since September 2024, yet the average credit card rate has only fallen 65 basis points from a record 20.79 percent on Aug. 14, 2024 to 20.14 percent at present. What gives?
There’s a lag
While the standard industry formula is to calculate credit card rates based on the Prime Rate plus a margin set by the card issuer, lenders don’t always use the Prime Rate on the same date. For instance, some apply the Prime Rate on your statement date. Other times, it’s the first of the month or the last of the month. Sometimes it’s the highest Prime Rate in the past 90 days. Or it’s only updated on a specific date once a quarter. In a falling rate environment like the one we’re in now, the longer the lag, the more slowly your rate will come down.
We measure new customer offers
Fed rate changes typically pass through to existing cardholders, but card issuers have more latitude to set rates on new customers. Our weekly sweep of 111 popular cards offered by the 50 largest U.S.-based credit card issuers evaluates rates charged to new customers.
For example, if a card has an annual percentage rate equivalent to Prime + 12 percentage points, that’s a 19.50 percent APR right now. If the Fed were to cut by a quarter-point but the issuer still wanted to charge 19.50 percent, it would be easy for them to update the new customer terms to Prime + 12.25 percentage points. Several have done this in recent months. Changes to existing customers require an additional notice period and only pertain to new purchases.
The path forward
Credit card rates aren’t likely to move much in 2025. Bankrate’s chief financial analyst, Greg McBride, CFA, forecasts an average rate of 19.80 percent at year’s end. That’s based on his estimate that the Fed will implement three quarter-point cuts in 2025, and it acknowledges that, because of the aforementioned factors, the national average won’t decline as much as the federal funds rate. So take matters into your own hands to pay down your debt as quickly and cost-effectively as possible, perhaps by signing up for a balance transfer card with a generous 0 percent interest promotion.
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