Almost all credit cards peg their interest rates to the Prime Rate, plus “X.” That “X” varies by issuer and cardholders. Some get better rates, perhaps Prime + 16%, others get higher rates with numbers like Prime + 26%. Every time the prime goes up, it means rates will rise.
According to Chase’s site which tracks Prime Rate, and is a go-to resource for analysts looking to understand the movement this important metric, the Prime has been parked at 5.5% since December 20, 2018. There were four increases during that year, advancing the rate 100bps in 2018, three rises in 2017, each of which being 25bps, bringing the metric from 3.75% to the current 5.5%.
Remember the good old days, where the Fed helped the U.S. economy by freezing the prime at 3.25% between December 12, 2008 and December 17, 2015?
CNBC reports that we might be looking at a decrease in today’s prime following the Federal Reserve’s decision to freeze the fed funds rate. The fed funds rate is one of the Prime Rate’s drivers, so if the former falls, the prime will fall; as that happens, card rates will drop.
- The Federal Reserve’s decision Wednesday to keep interest rates steady came as a relief to many. And rightfully so.
- After raising the federal funds rate nine times in three years, with the last move coming in December as financial markets were melting down, concerns about a slowing economy and looming U.S.-China trade war has caused the central bank to reverse course.
The Powell Pivot, as a metaphor connected to Fed chairman Jerry Powell.
- For consumers, the so-called Powell Pivot may mean a reprieve in escalating borrowing costs, which can impact your mortgage, home equity loan, credit card, student loan tab, and car payment.
But, alas, the impact on cards.
- On the heels of previous rate hikes, credit card rates now stand at a record high of 17.85%, on average according to Bankrate.
- If the Fed moves to cut short-term rates down the road, the prime lowers too, and credit card rates will follow suit.
Expect a small benefit. Since the Fed always prefers stability, the change will not be large. For consumers, this will be a kiss. For banks, there is no change since the spread protects interest rate risk and a cost+ metric.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group