The Federal Reserve, the European Central Bank and other major central banks cut interest rates Wednesday in a coordinated effort to stem the global financial crisis.
The Fed cut its key lending rate a half-point to 1.5%, and the ECB cut its key rate a half point to 3.75%. The Bank of England cut its key rate by a half point to 4.5%. The central banks of Canada, Sweden and Switzerland also reduced rates.
So what does this mean for consumers with credit cards on Main Street?
Well as the prime rate looks set to keep falling following the Federal Reserve's latest rate cut, and since the consumer credit-card rates are in part measured by the prime rate, consumers might expect to see their rates fall as well.
But a number of common catches can keep your credit-card rate from falling with the prime rate.
Your credit card may have a "rate floor" that prevents your rate from falling below a certain level, your credit score may have changed causing your rate to skyrocket or your creditor may raise rates because of economic conditions.About 90% of credit cards are variable rate, according to Curtis Arnold, founder of CardRatings.com. And most of these are tied to the prime rate as published in The Wall Street Journal plus a predetermined premium.
A rate floor is the minimum interest rate you'll pay, regardless of the prime rate. Say your rate floor is 10% and your premium above prime is 5%. If prime is 8% you'll be paying 13% interest. But if prime falls four percentage points, your rate will only fall three percentage points.
After you hit the floor, your rate stops falling.
So how do you find out if you have a rate floor before you hit it?
It's not always easy. Rate floors may not always be disclosed in credit card contracts, says Linda Sherry, Director of National Priorities at Consumer-Action.