No break seen on credit cards

Fed cuts will have little effect on debt incurred on plastic

The National Retail Federation forecast consumers would spend some $470 billion during the holiday season with a third of that expected to be on credit. (Frank Franklin II/Associated Press)

Just because the Federal Reserve is cutting interest rates, don't expect your credit card company to necessarily do the same.

Card issuers are likely to remain stingy about who will receive better rates - so relief from heavy credit card debt may not be a gift many will receive this holiday season.

"The prime rate drop is probably a small dose of good news for cardholders," Ben Woolsey, director of marketing and consumer research at CreditCards.com, said yesterday after the Fed slashed the federal funds rate to historic lows. "It should bring down rates a little bit for some people."

But numerous experts say the overall impact on credit card rates will be very limited.

"Not many cardholders are going to see significant cuts," said Greg McBride, senior financial analyst at Bankrate.com.

If ever there were a time for a giant serving of good news, this is it. Consumers coping with a recession and stock market plunge also are struggling under a large debt load, and the holidays will only add to the burden. The National Retail Federation forecast this fall that consumers would spend some $470 billion during the holiday season, with polling showing that close to a third of that was expected to be on credit.

The Fed's cut is hardly a rock in Americans' Christmas stockings. The lowering of the prime interest rate - which typically moves in tandem with cuts by the Fed in the federal funds rate - should soon trigger lower rates for home and car loans. The intent is to stimulate the flow of more cash into the economy, which could ultimately help reverse the downturn.

But credit card rates tend to be less responsive to changes in market interest rates than rates for auto loans or home mortgages, according to Bill Hampel, chief economist for the Credit Union National Association, because more is left to the issuers' discretion.

One reason is the increased presence of "floor" rates in the fine print of card agreements - predetermined points below which issuers won't let the rate drop, regardless of how low the prime rate falls. For example, if a card's rate is based on the prime plus 5 percent, with a designated floor of 10 percent, the rate on that card would not fall below 10 percent, even after the prime rate fell below 5 percent.

Also, according to McBride, card issuers have become much stingier about who gets the lower rates. Increasingly, that is confined to cardholders with strong credit and low balances, not the cardholders carrying large balances and struggling to keep their heads above water.

"If you're carrying a balance large enough that yesterday's interest rate cut would make a [noticeable] difference, you're probably not getting the lower rate," he said.

Most variable-rate credit cards are tied to the prime rate and - unless they have a floor rate - will see their rates drop 0.75 percent, matching the decline in the prime. Fixed-rate cards won't see a rate decline because of the Fed cut.

Rate reductions typically would take effect either in the next billing cycle or the next quarter, depending on the issuer. But the benefit won't be startlingly evident. Applying a 0.75 percent decline in interest rate to a card with a revolving balance of $5,000 would result in interest savings of only $38 a year, McBride noted.