Fed’s rate cut won’t help most credit card users

updated 6:35 p.m. ET Dec. 17, 2008

Just because the Federal Reserve is cutting interest rates, don't expect your credit card company to necessarily do the same.

Card issuers are likely to remain stingy about who will receive better rates — so relief from heavy credit-card debt may not be a gift many will receive this holiday season.

"The prime rate drop is probably a small dose of good news for cardholders," Ben Woolsey, director of marketing and consumer research at CreditCards.com, said Wednesday after the Fed slashed the federal-funds rate to historic lows. "It should bring down rates a little bit for some people."

But numerous experts say the overall impact on credit card rates will be very limited.

"Not many cardholders are going to see significant cuts," said Greg McBride, senior financial analyst at Bankrate.com.

If ever there were a time for a giant serving of good news, this is it. Consumers coping with a recession and stock market plunge also are struggling under a large debt load, and the holidays will only add to the burden. The National Retail Federation forecast this fall that consumers would spend some $470 billion during the holiday season, with polling showing that close to a third of that was expected to be on credit.

The Fed's cut is hardly a rock in Americans' Christmas stockings. The lowering of the prime interest rate — which typically moves in tandem with cuts by the Fed in the federal funds rate — should soon trigger lower rates for home and car loans. The intent is to stimulate the flow of more cash into the economy, which could ultimately help reverse the downturn.

But credit card rates tend to be less responsive to changes in market interest rates than rates for auto loans or home mortgages, according to Bill Hampel, chief economist for the Credit Union National Association, because more is left to the issuers' discretion.

AP Recovery's pace slower than first thought The economy is growing modestly, with consumers too wary about spending to invigorate the recovery.   Fed sees gradual economic recovery IMF chief: Global economy still fragile Watchdog: Stimulus job creation data flawed Dutch give ABN Amro billions in new bailout

One reason is the increased presence of "floor" rates in the fine print of card agreements — pre-determined points below which issuers won't let the rate drop, regardless how low prime rate falls. For example, if a card's rate is based on the prime plus 5 percent, with a designated floor of 10 percent, the rate on that card would not fall below 10 percent, even after the prime rate fell below 5 percent.

Also, according to McBride, card issuers have become much stingier about who benefits and gets the lower rates. Increasingly, that is confined to cardholders with strong credit and low balances, not the cardholders carrying large balances and struggling to keep their heads above water.

"If you're carrying a balance large enough that yesterday's interest rate cut would make a (noticeable) difference, you're probably not getting the lower rate," he said.

MORE FROM PERSONAL FINANCE

Personal finance Section Front

Survey: Surgeons top list of stressful jobs Late credit card payments drop in 3rd quarter Answer Desk: Jobless benefit bedlam 8 ways to slash your holiday budget Newsweek: Students increasingly hit by high-interest loans To lower rates, Citi customers must spend Survey: 60 percent plan to find new job in 2010 Many parents wrongly claim college tax credit A guide to holiday tipping during a downturn Survey: Economic recovery will be sluggish Personal finance Section Front   Add Personal finance headlines to your news reader: