Federal Reserve lowers interest rates for the first time in four years — how will this impact your credit cards?

Relief is coming for those struggling with high interest rates. On Wednesday, the Federal Reserve announced its first interest rate cut since March 2020, when the economy faced challenges due to the COVID-19 pandemic.

You might be curious about how this 0.5 percentage point decrease will influence your credit card balances and payments.

We often receive this question: What distinguishes the interest rate from the annual percentage rate? Are credit card APRs and interest rates identical?

Let’s examine how the Federal Reserve's interest rate influences your financial situation.

In what way does the Federal Reserve interest rate impact my credit card?

When the Federal Reserve modifies its interest rates, credit card APRs will also adjust — though this happens slowly. A cut in the Fed rate will eventually lower APRs for those with outstanding balances, but the immediate effect will be slight.

The true benefits may take time to materialize, thanks to the cumulative impact of several expected rate cuts through 2025.

Meanwhile, individuals should actively manage their finances by taking the following steps:

• Focus on eliminating high-interest debts
• Combine debts using a balance transfer card
• Consider applying for a 0% APR credit card for new expenses
• Look into a personal loan with lower interest rates than credit cards
• Research and compare competitive interest rates

How do interest rates differ from APR?

In some financial products, the interest rate and APR can vary. However, with credit cards, they tend to be quite similar.

According to the Truth in Lending Act, all consumer lenders must disclose their interest rates as APRs. The APR reflects the "true" yearly cost of borrowing money, incorporating fees and other expenses alongside the interest rate.

For example, when you obtain a mortgage, you’ll incur an origination fee and other initial expenses that are included in the APR. Thus, a mortgage advertised at an interest rate of 5.5% could actually cost you about 5.8% annually. In contrast, credit cards have an APR that exactly matches the interest rate.

Is the APR identical to the interest rate?

Yes, for credit cards, the APR is effectively the same as the interest rate. However, for other financial products like mortgages and car loans, the APR might exceed the interest rate due to additional fees and charges included.

Does the interest rate set by the Federal Reserve impact credit card APR?

Yes, because most credit card APRs are variable and adjust according to market fluctuations.

In summary, the Federal Reserve determines interest rates, known as the federal funds rate, which banks use for lending to each other or for borrowing directly from the Federal Reserve. Additionally, there is the prime rate, typically set 3 percentage points above the federal funds rate, which serves as a baseline for consumer loans and tends to fluctuate alongside the federal funds rate.

From this point, banks apply further markups depending on the loan type (such as home equity, auto, mortgage, or credit card) and the borrower's credit profile. Credit cards, which involve the least underwriting and allow for significant overspending—unlike car loans that can't be used for extravagant purchases—carry the highest risk, resulting in a larger markup.

Consequently, your credit card's current APR is effectively the prime rate plus an additional markup established by your bank. As the federal funds rate (and the prime rate) falls, so does your APR.

In conclusion

The APR and interest rate for credit cards are identical. However, annual fees or charges associated with balance transfers, cash advances, and late payments are excluded from the APR since credit card companies cannot foresee which cardholders will incur these fees.

You can completely avoid credit card APR by ensuring you pay your balance in full and on time, which aligns with one of TPG's 10 commandments of credit card rewards.

If you're focused on reducing your debt, a 0% APR card can significantly lower your borrowing expenses.