1 Reason Why Your Credit Card Payments Could Get Easier Next Year

A black credit card against a pink background
A black credit card against a pink background

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Americans' credit card debt has soared recently, reaching a historic high of $1.1 trillion. That's put a strain on some consumers' budgets, and the latest data shows that 1 in 5 cardholders has maxed out their credit card limit.

So, that's the bad news.

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The good news is that if the Federal Reserve starts cutting the federal funds rate later this year and throughout next year, it could lower credit card interest rates. Here's how.

A rate cut could lower credit card rates

The average credit card interest rate is a shockingly high 24.8% right now. But credit card annual percentage rates (APRs) are variable, meaning they can fluctuate based on the federal funds rate.

The Federal Reserve quickly raised the federal funds rate in 2022 and 2023 to fight inflation, pushing rates higher for nearly everything, including credit cards.

But the federal bank now says it could make one rate cut by the end of this year, with four potential cuts next year. If that happens, your variable credit card APR could come down.

It will take multiple cuts to feel any impact

Because credit card APRs are so high right now, one rate cut likely won't lower your rate enough for you to notice. However, four rate cuts could bring your APR down.

If the Fed made four rate cuts equal to a total 1% rate decrease, your credit card rate could theoretically fall by as much. Just keep in mind that it usually takes a month or two for credit card APRs to start coming down after the federal funds rate is cut.

How to lower your credit card rate right now

While your credit card payments could become more manageable next year, there's no need to wait around for policymakers to make a move. There are two ways you can immediately lower your credit card interest rate. Here's how.

1. Apply for a 0% balance transfer card

With credit card rates so high right now, using balance transfer cards can be a very smart move. You'll usually receive a low introductory interest rate, often 0%, for a set time (usually six to 21 months).

Opening one of these cards can help you pay off your credit card debt much faster. For example, if you have $5,000 on a card with a 24.8% APR and pay $250 monthly, it will take you 26 months to pay it off, and you'll have spent $1,449 on interest.

But if you transfer your $5,000 balance to a 0% credit card and make monthly payments of $250, you'll eliminate your balance in about 20 payments and pay $0 in interest. The only extra thing you'll have to pay is a balance transfer fee, usually between 3% to 5% of the balance. In this case, a 5% fee on a $5,000 balance would cost you $250.

2. Ask for a lower rate

Surprisingly, it's possible to ask credit card companies for a lower interest rate -- and many of them will give it to you. A recent survey showed that 76% of cardholders received a lower rate when they asked, with an average decline of more than six percentage points.

That could save you tons of money. Paying off $5,000 in debt at an 18.8% interest rate versus a 24.8% rate would save you $460 in total interest if you made monthly payments of $250.

While it'll be great for many cardholders if the Federal Reserve makes significant rate cuts next year, asking for a lower rate or applying for a balance transfer card now are smart moves. If you successfully lower your rate now, you'll be in an even better financial position if rates do indeed drop next year.

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