Credit Card Holders May Miss Out on Rate Cut

Not all borrowers will enjoy the benefits of the Federal Reserve’s latest interest rate cut, which will lower some key borrowing rates but won’t help consumers who are carrying big credit card balances.

Those holding home equity lines of credit and variable rate personal loans could see an immediate benefit from the Fed’s decision Wednesday to lower its benchmark lending rate by a half-point to 1.25%. These loan rates are usually tied directly to the prime rate that banks charge their best customers, and some banks Wednesday were already cutting their prime rates to 4.25% -- the lowest since the 1950s.

But credit card rates aren’t expected to budge. And with few expecting further Fed rate cuts this year, some experts said now may be the last chance for consumers to restructure debt and lock in today’s low rates.

“This looks to be the final call for people who haven’t yet taken advantage of the opportunity” to repay other debts by getting a home equity loan or refinancing their mortgage, said Greg McBride, financial analyst with rate-tracker BankRate.com in North Palm Beach, Fla.

“This is perceived to be the rate cut that will jump start the economy. When that recovery takes hold, we will inevitably begin to see higher interest rates.”

While many credit cards have variable interest rates, this rate cut wasn’t expected to have any effect on the millions of consumers who carry balances, said Robert McKinley, publisher of CardTrack.com, a Web site that tracks credit card offers.

The reason: Most credit card companies have put “floors” under their variable-rate cards, which assure that credit card rates don’t fall below set thresholds. Those thresholds, which are often set at 13% or 14%, were reached roughly a year ago, McKinley noted. Many credit card issuers have since moved to offering fixed-rate cards to avoid any question about whether consumer rates will drop with prime rates.

“As a matter of fact, many issuers have been raising rates on card holders whose credit scores have declined,” McKinley said. “MBNA [one of the nation’s biggest credit card issuers] is now charging some customers 24.98% if they determine that the customer’s risk has increased.”

Rates for new auto loans are expected to fall in tandem with the Fed’s move, benefiting those now shopping for a car.

However, since many consumers already took advantage of promotional zero-percent offers that automakers used to move cars last year, the effect of the rate cut on auto loans was muted, said Keith Gumbinger, vice president of HSH Associates, a Butler, N.J., interest rate research and analysis firm.

As for long-term interest rates, such as on mortgages, the Fed doesn’t directly control those rates. It can influence them with its changes in short-term rates, but the trend in long-term rates is determined by the marketplace.

The Fed cut short-term rates because it believes the economy is weak. If investors begin to believe the economy will pick up, however, they could push longer-term rates higher.

Rates on 30-year fixed-rate mortgages were running at about 6.125% for a conventional loan Wednesday, said Steven Foster, president of Vista Financial, a North Hollywood-based mortgage brokerage. That’s up slightly from three weeks ago, when the rate for a 30-year mortgage with no points was below 6%, he said. But it’s still very low by historical standards.

Meanwhile, rates for home equity lines of credit, which are variable-rate loans tied directly to the prime rate, are plunging.

As of Wednesday, the nationwide average home equity loan rate was 5.21% compared with 5.98% a year ago, and 9.27% in November 2000, McBride said.

That record low rate is likely to spur another wave of refinancings, with consumers rolling auto and credit card loans into either home equity lines of credit or newly secured first mortgages, Gumbinger said.

However, home equity loans can be dangerous for consumers who remain in debt for long periods, Foster cautioned. That’s because the loan rates, while low now, can rise rapidly if the economy begins to grow and interest rates start to rise.

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Outlook for other interest rates

Here’s a look at what may happen with other lending and investment rates in the near term in the wake of the Fed’s move:

Item: Prime lending rate

Current rate: 4.75% (most banks)

Outlook: A few banks on Wednesday cut their prime rates in tandem with the Fed’s move, to 4.25%. Most major banks didn’t announce cuts, perhaps because the size of the Fed’s reduction was a surprise. But the industry is expected to go along with a half-point cut as early as today. The prime is a benchmark for many business and consumer loan rates.

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Item: Money market mutual fund average yield (seven-day)

Current rate: 1.21%

Outlook: Money-fund tracker IMoneyNet.com predicted Wednesday that fund yields, already at record lows, will fall by a half point over the next six weeks, tracking the Fed’s cut.

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Item: 1-year CD yield (U.S. average)

Current rate: 1.73%

Outlook: CD yields, like money fund yields, already are at record lows. Whether banks cut CD rates by a full half point will depend on how hungry they are to attract or retain deposits, experts said.

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Item: 10-year Treasury note yield

Current rate: 4.03%

Outlook: The Fed doesn’t directly control long-term interest rates. Cuts in short-term rates can put downward pressure on long-term rates, but bond yields ultimately are determined by investors’ perception of the economy’s strength and the level of inflation. For now, investors generally believe the economy is weak.

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Item: 30-year mortgage rate (Freddie Mac)

Current rate: 6.13%

Outlook: Mortgage rates tend to track 10-year Treasury note yields. If investors believe the economy will remain weak for some time, and T-note yields fall further, mortgage rates would follow.

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Sources: IMoneyNet.com, Times research