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

Written by Curtis Arnold
Posted On: May 2, 2008

The Fed announced a 25 basis point rate cut, bringing a key rate to 2.00 percent. The prime rate will also fall one-quarter of a percentage point to 5.00 percent. The move by the Federal Open Market Committee followed several rate cuts in the first quarter of 2008 that brought the federal funds rate down to its lowest level since December 2004.

This was the seventh consecutive rate cut. The Fed said in the statement accompanying the rate-cut announcement:

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

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:

"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."

The good news for some cardholders is that since the prime rate fell, interest rates on many variable rate credit cards will fall as well. Most credit 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 on variable rate cards. Unfortunately, though, a significant portion of consumers will see no benefit at all for various reasons. For example, consumers with fixed rate credit cards will see no changes in their rates. The current average rate based on all the cards listed in our comprehensive database is about 12.5%."

It is worth noting that this latest rate cut brings the total rate cuts to 3.25 percentage points since September 2007. Many analysts feel this rate cut may be the last one that the Fed does for a while. Time will tell!