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How Fed rate cuts affect credit card interest rates

Q. When the prime rate and other key rates are falling, does that mean credit card interest rates will decline as well?

A. Generally, yes. Fed rate cuts often translate into better deals for many credit card holders, said Justin McHenry, research director for, which compares credit card features.

On the other hand, a number of credit card companies have recently raised rates despite the recent rate cuts by the Federal Reserve. This may be in response to the subprime mortgage crisis and unrest in the credit markets. So some credit card holders may have actually seen increases in their rates

Depending on your credit card agreements, payment history, and credit history, cardholders may find that their interest rates fall automatically after a Fed rate cut. If, for example, your rate is prime plus 4.99 percent, your Annual Percentage Rate, or APR, may fall along with the prime rate.

And you might be able to get an even better deal.

“For a

lot of people, this is a good time to either see if they can get a lower rate, or to look around” for other cards charging a lower rate, McHenry said.

Some credit cards have a floor below which rates can’t fall, he said. But it’s cheaper for a credit card company to keep old customers than to recruit new ones, so many companies are willing to bargain within those limits to keep good customers.

“Your best negotiating point is how good your credit history is and whether you actually could go get another card,” according to McHenry. “You need leverage on your side. The more you know about your credit history, the more leverage you have in asking for something.”

One caution: Your credit could take a slight hit if you close an older account in favor of a new one, especially if you will be close to the credit limit on the new account with a balance transfer.

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Category: Credit

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