Credit card debt: A Fed rate cut might not help, but here are 3 things that could

The Federal Reserve is expected to cut rates by at least 25 basis points at its September meeting. But what does that mean for your borrowing costs? Yahoo Finance Senior Credit Cards Writer Kendall Little joins Wealth! to break down how falling interest rates may impact your credit card.

Little notes that higher interest rates have put a strain on credit card holders as balances and delinquencies are on the rise. She highlights that total credit card debt crossed $1 trillion just last year, and the average interest rate today hovers around 21%. However, she explains that interest rate cuts have historically not had a significant impact on credit card interest rates.

Therefore, before the Fed initiates an interest rate cut, consumers should start taking action to eliminate their credit card debt. She encourages them to make plans to get their balances down while interest rates are high. She recommends opening a balance transfer credit card, which usually offers 0% APR for about the first year, to make payments toward debt.

Personal loans are also a consolidation option for people with credit card debt. While personal loans have higher interest rates than balance transfer credit cards, they will likely be lower than the current credit card interest rate, allowing you to save money on interest charges.

Finally, Little encourages consumers to pay attention to their spending habits and cut back on overspending to not add more debt to the pile. One way to do this is to use debit cards or cash instead of credit cards, so you're not spending more than you can afford.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Video Transcript

The Federal Reserve is expected to cut rates by at least 25 basis points at its meeting next week, September here and Midpoint of September.

A lot of investors are excited because this could mean lower borrowing costs for businesses and consumers going forward.

So how big of an impact will this have on you and your credit card here with some answers?

We've got our very own Kendall Little Kendall.

So what type of change should people ultimately anticipate here?

Yes, So just to give a little bit of context, this period of higher interest rates has been tough for a lot of credit card holders.

We've seen balances growing.

We've seen delinquencies on the rise.

Just last year, credit card total debt hit a trillion dollars.

Um, and if we look at interest rates back in 2022 before the current rate hike cycle, uh, average rates were around 16%.

Now they're closer to 21% and rising.

Um, and we've seen credit cards with APR S that are even closer to 30%.

So all that adds up to a pretty tough cycle for credit card holders.

Um, but the important thing to remember is that the Fed's moves are only one part of what determines your credit card interest rate.

So you know whether the Fed lowers rates by 25 basis points by 50 basis points.

Historical data shows us that that probably is not going to have a very significant impact on what your credit card interest rate is.

So if someone has credit card debt, what should they do now before the Fed cuts rates?

Yes, so today and every day is a great time to really start taking to eliminate that credit card debt really make the moves that are going to start getting those balances down while credit card interest rates are high.

One way that we we really recommend them that we like is the balance transfer credit card.

These credit cards offer 0% APR for typically between 12 and 21 months.

Um, so that means that you're gonna have over a year with no interest charges.

On that balance, you can really work toward getting it down.

Um, you do have to think about balance transfer fees, but that 3% to 5% fee is really nothing compared to the interest charges another consolidation option for some people is gonna be a personal loan.

Um, you're not gonna find a 0% personal loan, but personal loan rates are typically much lower than credit card interest rates.

So again you can save on those interest charges.

And then the last thing that you really should make sure you're paying attention to is stopping that overspending in its tracks.

So while you're taking on, you know, this period of paying down your debt, you don't wanna add to the debt.

So if that means starting to spend more with cash or using a debit card, you might forfeit some rewards and cash back.

But again, that's gonna be a lot less of a hit than the interest charges that you would have.

Kendall, thanks so much for taking the time with us as well.

Um, you know, this is gonna be something major to track here.

Lastly, maybe we can insert this into the chat just before we let you go from credit cards to loans as well.

I mean, how should people be thinking about their loan strategy R right before this potential interest rate cut?

Well, I think it's gonna depend on whether you have a variable rate loan or a fixed rate loan, so credit cards are variable, so that means that you know the rate can change.

But if you have a fixed rate loan, it might have less of an impact.

But either way, the higher interest rate is going to be.

You're gonna wanna make sure that you're paying those down as quickly as possible.

Kendall Little, Yahoo Finance's own.

Always ready for any topic that gets her thrown thrown her way.

Kendall.

Thanks so much, of course.