How Do Falling Interest Rates Affect Your Credit Card?
When the Federal Reserve drops interest rates, it generally causes the prime interest rate to fall. Currently, the prime interest rate is at its lowest point in seven years.
More than half the credit cards issued have a variable interest rate that is tied to the prime interest rate. When the prime rate falls, the interest charged on those cards should drop. However, many credit card companies set limits on how low the rates can fall. For example, a credit card company might charge the prime interest rate plus 5%, but not less than 14%.
To avoid high credit card rates, many Americans are refinancing their mortgages at a lower rate, and at the same time, consolidating consumer debt into the new loan. Combining consumer debt with your house debt could prove to be an expensive and risky move. Studies show that more and more Americans are falling behind in their mortgage payments. Some of them will end up losing their homes. In addition, the cost of a $100 meal refinanced over 30 years at 7% will end up costing you over $815. You could end up paying more interest than you would have on the higher rate card.
Before you sign up for a new card or take on debt of any kind, make sure you understand the long-term consequences. For assistance, give us a call.
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© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010703.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.