MW The Fed cut rates again - but don't expect your credit-card APR to get much lower anytime soon. Here's why.
Andrew Keshner
Interest-rate cuts are supposed to lower borrowing costs, but that's not necessarily happening for credit-card users
The Federal Reserve has taken sizable steps to lower its benchmark interest rate this year, but credit-card issuers have just tip-toed lower on the rates they charge cardholders - reflecting a strategy to handle consumers who are using their cards often, but sometimes getting behind on their bills.
After Wednesday's cut and two before that, the central bank's rate sits at a range of 4.25% to 4.50%, which is a full 1% or 100 basis points lower from the year's start. A basis point is one-hundredth of one percentage point.
Compare that to the story on annual percentage rates on credit cards in a year when the rates on new card offers reached record heights. Americans now have $1.17 trillion in credit-card debt and delinquency rates are around 2011 levels.
Credit-card APRs "are not flying down but they are going down. These things do take a little bit of time and issuers tend to do them at their own pace," said Matt Schulz, chief credit analyst at LendingTree (TREE).
LendingTree data pegs the average APR this month at 24.43%, down from a record-breaking 24.92% in September and August. That's a 49-basis-point decline on average.
Some cards are decreasing the lower bounds of their rates for customers with better credit scores, but not the top rates for customers who are at bigger risk of becoming delinquent on their credit-card bills, according to Schulz.
It's a signal that credit-card issuers "feel better as it relates to people with good credit than people with imperfect credit," he said.
After the APRs on new card offers hit a record 20.79% average in August, according to the personal-finance website Bankrate, its data shows the rates on new cards averaging 20.35% this month. That's 44 basis points lower.
If credit-card shoppers are looking for rate relief in 2025, they should look elsewhere, said Ted Rossman, Bankrate senior industry analyst. "This is high-cost debt, no matter how you slice it," he said.
People who are carrying a balance on their credit cards have yet to see the impacts of the Fed's cuts. In fact, their rates are going in the opposite direction: up.
Average interest rates on existing credit-card accounts carrying a balance increased to nearly 23.4% in the third quarter, according to Federal Reserve data, a multi-decade high. That's up from approximately 22.8% in the second quarter.
Why aren't credit-card APRs going down so much?
There are fine-print reasons for the sluggish move lower for credit-card APRs and big-picture reasons too, experts say.
Many card issuers now use the prime rate as a starting point to determine credit-card APRs. The prime rate is generally the Fed's benchmark rate, plus another three percentage points.
Card issuers then add their own margins, which can hinge on the creditworthiness of the person applying for their cards.
The prime rate is now 7.5%, after the latest Fed cut.
Different credit cards have different timelines for when they look at the prime rate to set their APRs, said Rossman. Some do it on a monthly basis, some do it less often, he said. "It gives them a little leeway to drag their feet on cuts," according to Rossman.
For example, the Capital One $(COF)$ VentureOne Rewards card is "indicative of the lag that can take place," he said. The bank looks to the prime rate as it stands on the 25th day in the final month of each quarter, according to its rate disclosures. Presumably that means that APRs on the Capital One card could go down next week, he noted.
The APR on Capital One's VentureOne Rewards card after the 0% introductory rate is currently either 19.49%, 25.74% or 29.49%, depending on your credit score. That's down from 19.74%, 25.74% and 29.74% as of earlier this month. Capital One did not immediately respond to a request for comment.
Some card issuers have nudged up rates on new card offers in certain instances, Rossman noted.
Since September, Discover $(DFS)$ has decreased the upper level APRs for the Discover it Miles, Discover it Chrome Gas & Restaurant and Discover it Cash Back card. The upper-level APR is 27.49%, which is down from 28.24% in September, according to Bankrate data and Discover's website.
But the lower range APR crept up to 18.49% this month, up from 18.24% in late September. Those rates, depending on creditworthiness, kick in after a 0% introductory rate. Discover did not respond to a request for comment.
Big picture reasons for smaller drops on credit-card APRs
The size of Fed rate moves and prime rate moves do not guarantee credit-card APR rate moves of the same magnitude, said Brendan Browne, managing director of S&P Global Ratings. "The data would suggest it's not always one to one," Browne told MarketWatch.
Then there are the big 'Ds,' according to Browne and Michal Selbka, associate director at the firm. That's demand for credit cards from consumers, delinquency rates and deposit costs when interest rates are still high, they explained.
Americans turned to credit cards as inflation scorched wallets, making card originations pop in 2022 and 2023, according to TransUnion $(TRU.UK)$ data. Amid ongoing demand, Browne said card issuers may be using their APRs as a way to curb cardholders from racking up too many debts that can't be repaid.
Around 8.8% of credit-card debt transitioned to early-stage delinquency in the third quarter, according to the Federal Reserve Bank of New York. While that's a high rate historically, it was the first decrease in delinquencies in around three years.
The Fed's previous interest rate increases may be playing a role too, said Selbka.
Lending, through credit cards and other forms of credit, is one part of a bank's balance sheet. There's also deposits, and the interest that banks pay on those deposits. If banks are paying higher deposit rates, Selbka said they have to carefully weigh how fast to decrease their lending rates.
A final wrinkle could be the uncertain fate of a Biden administration rule to cap credit-card late fees at $8, Selbka noted. The Consumer Financial Protection Bureau's rule has been tangled in court but some card issuers - especially with customers at lower credit scores - haven't waited for the resolution of a threat to their revenue.
Before the rule's final form and before the Fed rate cuts, nudging APRs higher may have been one hedge against the rule, he said.
What's next for credit-card APRs?
The Fed cut 25 basis points and then signaled it was prepared to go slow on 2025 cuts. Markets didn't like the message and it's also tough news for rate-sensitive credit-card shoppers because it's unclear how much credit-card APRs will fall next year.
Fed officials are penciling in the chance of two 25-basis point cuts next year, noted Dave Grossman, founder of Your Best Credit Cards. "That will barely make a dent in credit-card interest rates," he said. If the economy deteriorates and more consumers aren't able to pay their credit-card bills, the uppermost APRs for cardholders with lower scores could go even higher, he noted.
It reaffirms the view from credit-card experts that helping people with their credit-card bills will not come with interest-rate cuts and lower APRs. Budgeting to pay down debts, $0 balance transfer cards and credit counseling are better moves, depending on a household's financial picture, Rossman said.
In the broadest sense, Schulz thinks APRs will generally be lower by the end of 2025. But any sort of precision is difficult. "Anybody who is telling you they know what it's going to be like at this time next year is just wrong."
-Andrew Keshner
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(END) Dow Jones Newswires
December 19, 2024 15:27 ET (20:27 GMT)
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