The Federal Reserve announced Sunday that it would cut benchmark interest rates to near zero to help ease the economic impact of the coronavirus.
U.S. stocks tumbled into a bear market after the spread of the coronavirus sparked concerns about a possible recession. Many Americans are already feeling the effects of an economic slowdown, as the pandemic has forced many businesses to close and led to layoffs across the country.
The Fed hopes that lower interest rates, which are now targeted at 0%-0.25%, down from about 1%, will make it cheaper for businesses and consumers to borrow money, should help ease some of the financial pressure on businesses and consumers. And you could benefit from the rate cut as a consumer as the interest rate on your credit card goes down.
Total U.S. credit card debt surpasses $1 trillion, according to the Federal Reserve. That means lower interest rates could help Americans save hundreds of dollars each in credit card interest, according to Matt Schulz, an industry analyst at Compare Cards.
Here's what you need to know.
Americans will likely see interest rates on their credit cards drop by around 1% but not right away, says Schulz. "People won't see the impact of this immediately. These rate reductions tend to be passed along within a couple of billing cycles."
That's because most Americans have variable-rate credit cards, meaning their rates move up and down when the Fed's rate changes, he explains.
A decrease of 1% may seem like it won't provide much relief, but a small change can have a big impact over time. The average balance-carrying household owes around $9,300 in credit card debt, according to Value Penguin. If the average credit card APR, or annual percentage rate, drops from 19% to 18%, consumers would be able to pay off that card in 55 months instead of 57 months with the same minimum monthly payment of $250.
"That means that the 1 percentage point rate cut would save this person $442 in interest and two months of payoff time. That's significant," says Schulz.
Though a 1% decrease can help you save money, an APR of 18% still means that the average balance-carrying household is still paying thousands of dollars in interest, in addition to the principal.
"While I expect the average credit card rate to fall to around 16% over the next month or two, that's still a high rate. It's roughly 3 to 4 times higher than most mortgages, student loans and auto loans," says Ted Rossman, industry analyst at Bankrate.
To save even more money, another option is a balance transfer. A balance transfer allows you to move your outstanding balance from one credit card to a new card with a low or even zero APR. These low APR offers generally last for a year or two.
Video by Ian Wolsten and Euralis Weekes
"I think balance transfer cards are a great idea," says Rossman. "The ability to pause the interest clock for up to 21 months is really powerful. You could save hundreds or even thousands of dollars in interest, depending on how much you owe."
If you do decide to transfer your balance to a card with less or no interest, watch out for transfer fees, Rossman warns. "An increasing number of these cards are charging 5% upfront to transfer balances, while others charge 3 or 4%. There are three cards that offer 15 months with no interest and no transfer fees: the Chase Slate, American Express EveryDay, and BankAmericard."
To get the full benefit, pay off the card's balance in full before the zero-interest time frame expires.
If you do end up seeing a decrease in your interest, be smart with the money you save, says Schulz. And if you're able to take advantage of a balance transfer, "you just need to make sure that you don't see this new card as an excuse to go on a spending spree."
Rossman recommends bolstering your emergency savings fund with the money you save on interest. "Many households have immediate cash flow needs, given coronavirus-related layoffs, lost shifts, and otherwise reduced incomes. There's also the whole fear/uncertainty element. Most households were already under-saved for emergencies," he says.
"I don't want to be too alarmist, but I also want people to be smart," he adds. Try to use the money to save rather than spend: "I'd advise against any big risks, major trips, or sizable retail purchases."
Generally, financial advisors recommend that your emergency fund contain enough to cover 3 to 6 months' worth of household expenses. Given the current economic uncertainty, Rossman says, it's especially important to try to put away enough to cover unexpected costs.
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