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The Federal Reserve is again lowering its target federal funds rate range — after The Federal Open Market Committee (FOMC) session on December 18, 2024, the range now sits at 4.25%-4.50%.
The Fed’s interest rate moves affect many types of debt — including personal loans, home equity, student loans, and more. Credit card balances and the interest rates they carry are no exception. But while ongoing rate cuts could lead to minor drops in credit card interest rates, cardholders should still expect APRs to remain high for the foreseeable future.
Here’s more information about the central bank’s latest decision and how interest rate movements can affect your credit card balances.
The Federal Reserve is the central bank of the United States. It sets monetary policy partially by adjusting the federal funds target rate range. Starting in March 2022, the Fed increased this range several times, aiming to bring down high inflation rates. After peaking at a more than 20-year high of 5.25%-5.50%, the Fed began cutting rates in September 2024. In December 2024, it cut rates for the third consecutive time.
But what does this have to do with your credit cards? While the target range set by the Fed doesn’t directly change your credit card APR (annual percentage rate), it does play a significant role.
Here’s a breakdown of how the process works, from the Fed’s target rate range to the prime rate determined by banks to your credit card’s APR:
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Federal funds rate: This is the interest rate that banks charge each other for short-term loans. The Fed sets a target range for this rate at its Federal Open Market Committee (FOMC) meetings. Most recently, the Fed lowered this range to a 4.25%-4.50% target.
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Prime rate: This is a benchmark rate for lending products offered by banks. The Fed doesn’t directly set the prime rate, but it’s based on (and tends to move alongside) the federal funds rate.
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Credit card interest rates: Lenders determine a variable rate range for credit cards using the prime rate, plus an added margin. Your interest rate will fall within this range based on various factors, like your credit score, as determined by your credit card issuer.
In summary: The Fed sets a target federal funds rate range, which banks use to determine their prime rate. Issuers then add percentage points on top of the prime rate to determine your credit card’s rate range.
You’re not alone if you pay more toward your credit cards now than you did a few years ago. The amount of high-interest debt Americans owe is growing.
After exceeding $1 trillion in 2023, credit card debt balances grew to $1.17 trillion in the third quarter of 2024, according to the Quarterly Report on Household Debt and Credit from the New York Fed. At the same time, credit card delinquencies are also rising, with more than 7% of card accounts transitioning into “serious delinquency” of 90 days or more.
Related: How to pay off credit card debt when your budget’s tight
Credit cards carry variable APRs that change with the prime rate, a big reason why the Fed’s interest rate moves can impact credit cardholders. But that’s not the only factor that goes into your assigned credit card APR — which is why you shouldn’t expect the amount you’re charged to drastically change alongside Fed rate cuts.
When the Fed raised interest rates from near-zero to more than 5% starting in March 2022, APRs set by credit card issuers increased. After remaining relatively stable between 14% and 16% in the years prior, average credit card interest rates skyrocketed to today’s average of 21.76%. Those who carry interest on their credit cards pay even more, at 23.37% on average.
Here’s a look at how the amount you owe can change when interest rates rise:
Since September, the Fed has cut its federal funds rate range by one full percentage point, to a target of 4.25%-4.50%.
That doesn’t mean you should stop paying down debt because rates are going down. Even if your credit card APR moved in sync with that rate, it would still leave you with very high interest charges. Moving from a 20% APR to a 19% APR, for example, could save you some money as you pay down your balance. But credit card debt accrues very quickly and making only minimum payments at that APR could leave you with expensive, mounting balances.
Following the December FOMC meeting, there’s some uncertainty about the Fed’s moves in 2025, though some additional cuts are expected.
Even if federal interest rates continue to fall, don’t expect big changes to your credit card APR. Carrying a credit card balance is one of the quickest ways to accrue lasting high-interest debt. If credit card rates do return to where they were before the pandemic, that still means double-digit APRs for any balances you don’t pay by the due date.
Here are some ways you can limit interest charges in any rate cycle:
Making more than the required minimum payment each billing cycle can help you pay down balances faster. Pay off your credit card purchases in full whenever possible to avoid debt altogether and maintain good credit.
If you already have credit card debt, a 0% APR offer on balance transfers could help you reduce it. When you make a balance transfer, you can pay down your existing balances without interest over a period typically lasting around 12 to 21 months (after paying a balance transfer fee).
Any remaining balance will accrue interest at the standard variable APR when the offer ends.
Read more: The best balance transfer credit cards
Some credit cards carry low intro APRs on both new purchases and balance transfers. If you’re considering opening a new credit card, securing a lower interest rate for several months could help you avoid rising APRs for a while or pay off a large purchase interest-free over the intro period.
If you’re thinking about applying for a new card with a 0% APR offer, compare your options before applying. The best credit card for you depends on your individual situation, so it’s important to consider all the details and how the card may fit your longer-term financial goals.
Read more: The best 0% APR credit cards
Remember: The best way to avoid interest is to pay your balances in full. No matter which card you choose, charging only what you can afford to pay off is the best way to keep rising rates from affecting your wallet.
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