Fed Cuts Key Rate By Three-Quarters of a Point: Credit Card Users Will Likely Benefit

Written by Curtis Arnold
Posted On: March 25, 2008

The Fed announced a 75 basis point rate cut, bringing a key rate to 2.25 percent. The prime rate will fall three-quarters of a percentage point, also, to 5.25 percent. The move by the Federal Open Market Committee followed a half-percent rate cut Jan. 30 and brought the federal funds rate down to its lowest level since December 2004.

This was the sixth consecutive rate cut. Also in September, the fed funds rate stood at 5.25 percent. The Fed said in the statement accompanying the rate-cut announcement:

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

So, why is this happening? The goal is to promote spending and borrowing to boost the economy and to recharge the buying power of American consumers.

According to John Hoefl, a financial advisor with Ameriprise Financial in Little Rock, Arkansas:

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"The rate cuts will be especially great for consumers if they take advantage of low rate cards such as Simmons Bank and Pulaski Bank. They have some of the lowest rates in the country."

Why didn't the Fed cut rates a full point as was rumored by some analysts? A cut of a full percentage point had been widely expected, but the Fed apparently believed that would be too inflationary:

"Inflation has been elevated, and some indicators of inflation expectations have risen," the central bank said in its policy statement. "The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased."

According to the Fed,

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

The good news for cardholders is that since the prime rate fell, over the coming weeks and months interest rates on most variable rate credit cards will fall by 75%. Most cards issued today have variable rates that typically move up and down in response to the prime rate.

Curtis Arnold, Founder of CardRatings.com and author of How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line, notes:

Given the recent rate cuts, if you are paying over 10% on your current credit card and you have a credit score above 700, then I would strongly suggest that you search our listings of low rate credit card offers. The rate cut should have a positive impact on most consumers that are revolving credit card debt, though not all consumers will benefit. An example would be a cardholders that has a fixed rate card. The current average rate based on all the cards listed in our comprehensive database is 12.82%."

It is worth noting that this latest rate cut brings the total rate cuts to 3 percentage points since September 2007.