The Fed Cuts Rates Again–But How Much Savings Will This Mean For You?

As expected, the Fed cut interest rates again on Tuesday, this time by a staggering 75 basis points, lowering the prime rate to 5.25%. One would think that such a massive move would result in a lot more dollars in the pockets of consumers. After all, over half of credit cards surveyed by the Fed are tied to the prime rate. (The real number of cards tied to the prime rate is probably even higher since the Fed’s survey underrepresents the number of cards issued by the larger banks.)

Unfortunately, when you do the math, the actual savings in credit card interest will not amount to much for most consumers. According to the latest Fed figures, total revolving consumer debt, which is basically credit card debt, was about $947.4 billion in January 2008. The latest census figures that I could find estimate the number of U.S. households in 2005 as 113.1 million. That puts the average credit card debt per household at roughly $8400. This number is inflated since the Fed numbers include credit card debt of households who pay off their balances in full every month. For the sake of argument, however, let’s use the $8400 number. Over the course of the year, the 0.75% cut will save that family roughly $60, or $5 a month. It’s something, but not exactly an earth-shattering number.

The bigger problem is that some issuers are choosing not to pass their savings along to the consumer, in light of the uncertainty in the credit market. For instance, CapOne recently elected to decouple interest rates on its cards for customers with good credit from the prime rate. Other issuers are making heavier use of tiered interest rates, where the margin you pay above prime can vary depending upon your application and credit history. In this way, they can better manage their interest rates, without outwardly revealing any changes.

Of course, the best way to insulate yourself from all of these changes is to pay your balance in full every month, which is what I hope that all regular readers would do anyway.

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