What will Happen With Credit Card Rates When the FOMC Changes Prime

The interest rates on credit cards is referred to as the annual percentage rate. This is the yearly rate that is applied to the outstanding balance on a credit card. The APR can vary from year to year and even on different transactions. Consumers need to know the various factors that affect the APR. One factor that all financial institutions use is the prime rate that is set by the FOMC. Consumers with credit cards are affected by a changing prime rate and need to understand the consequences.

Prime Rate

Banks and credit card issues used the prime rate as a term that applied to a special rate given to a group that was preferred. This included customers who repaid previous loans on time with a healthy financial reputation. However, these characteristics are not used to describe the prime rate. The prime rate that is used today refers to the interest rate between banks. This is a rate that is set using the federal funds rate and adding three percent.

Banks use the federal funds rate as a basis for charging other banks for loan. This rate can change up to eight time per year based on the FOMC or the Federal Open Market Committee. Banks will change the interest rates for certain loans and credit cards whenever the prime rate changes. One detail a consumer will need to keep in mind is the teaser rates offered by credit card companies. Many will try to attract a consumer with an introductory rate that is below the prime rate. However, introductory rates will go up based on an adjustable rate.

Variable Rates

Variable rate credit cards are the most common issues by banks and credit card companies. These cards have a base percentage plus the prime rate. This means a credit card with an eight percent base rate has a rate of 11 is the prime rate is at three percent. However, moat banks have increased their base rate for credit cards to twelve percent or higher after the financial crisis of 2008. A variable rate credit card can have a higher interest rate whenever the prime rate goes up.

The FOMC has kept the federal funds rate at a range between zero and one-quarter percent since 2008 when the financial crisis occurred. This was to help the economy recover and not keep the consumer in a downward spiral of debt. The financial crisis of 2008 was the worst financial crisis to occur since the Great Depression. Consumers are benefiting from low interest rates applied to loans and on credit card interest rates. However, the FOMC may increase the federal funds rate in 2015. This will mean there is a change that will occur to the interest rates on variable rate credit cards.

Consumes need to be vigilante in keeping up with the current interest rate on their credit cards. If there is an increase in the prime rate, then it will be applied to credit card interest rates. A minimum payment will increase as a higher rate of interest will be applied to outstanding balances.

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