How Fed Rate Changes Impact Your Credit Card Interest Rate
4 Min Read | Last updated: May 2, 2025
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When the Federal Reserve changes interest rates, credit card interest rates adjust too. Learn how the Fed’s interest rate policy influences credit cards.
At-A-Glance
- There tends to be a close relationship between Federal Reserve interest rates and credit card interest rates.
- When the Fed raises or lowers interest rates, credit card interest rates may follow suit.
- But even when the Fed cuts rates to 0%, credit card interest rates may not fall to zero since they’re also influenced by other factors.
When the U.S. Federal Reserve increases or cuts interest rates, credit card interest rates may rise and fall with them. But how is it that Fed interest rate changes influence credit cards? And why are credit card interest rates sometimes higher than the interest rates we see being discussed in the press?
To help clarify the relationship between Fed interest rates and credit card interest rates, here’s an overview of how credit card rates generally work, and how Fed rate cuts and rises flow through the financial system to influence credit cards.
How Credit Card Interest Rates Work
Credit card interest rates are based on the “prime rate,” which is the interest rate that banks charge their best, or “prime,” customers – those they think are least likely to default on their loans.1 For other customers, banks and credit card issuers add a “margin” to the prime rate.2 The lower a borrower’s credit score, the higher the margin. So, someone with an average score may have a higher interest rate on their credit card than someone with a top credit score.3,4
The reality is there’s no one single prime rate. Instead, each bank sets its own prime rate. The Wall Street Journal publishes the prime rate every day, but this rate is an average of multiple major banks’ prime rates.5
Connecting Fed Rate Cuts & Credit Card Interest Rates
Whatever the interest rate on your card, it may fall when the Fed cuts interest rates, unless it is a 0% intro Annual Percentage Rate (APR) credit card or you are still in another type of introductory low rate period. Similarly, the APR on your credit card will likely rise when the Fed raises rates.6 Here’s how this works.
The Fed’s main job is to adjust interest rates to meet its long-term inflation target of 2% per year.7 If inflation looks as if it’s rising above target, the Fed may raise rates; if inflation is set to sink below the target, the Fed may cut them.8
But the Fed doesn’t directly control interest rates, including the prime rate. Instead, it sets a “target range” for the Federal Funds Rate, which is the rate at which banks lend to each other for short-term loans they may need.9 It may be about three percentage points lower than the prime rate.6,10
So, when the Fed cuts interest rates, what it actually does is lower the target range for the Federal Funds Rate.11,12 The Fed uses the theory of supply and demand to get interest rates to fall into its desired target range: it buys and sells securities, which increases or decreases the total supply of money available in the economy. But it doesn’t aim to hit the bottom of its desired range.13
Banks and credit card companies earn their keep by charging higher interest rates on credit cards and other lending than they pay on deposits and other forms of funding.14 When the Fed reduces its target range, banks’ cost of funding falls.15 Usually, they pass this on to customers by cutting the prime rate, which reduces interest rates on loans and credit cards. Because credit cards may have variable interest rates, when the Fed cuts interest rates, chances are that lower interest on credit cards may be one result.8,6
Could Credit Card Interest Rates Fall to Zero?
For average credit card interest rates to fall to zero, both the Federal Funds Rate and the prime rate would have to be well below zero – or what’s commonly referred to as “negative rates.”16 But some cards have introductory offers of 0% APR on balance transfers and/or purchases, and introductory periods can last as long as 18 months. So whether the Fed is cutting rates or not, it’s worth shopping around for credit card offers.
The Takeaway
Credit card interest rates may fall when the Fed cuts interest rates and rise when the Fed raises rates. But it’s unlikely that credit card interest rates would fall to zero, even if the Fed announces interest rates of zero. There are two main reasons. First, credit card interest rates are based on the prime rate, which may be higher than the Federal Funds Rate. Second, credit card issuers usually add a “default margin” to credit card interest rates.
1 “How Do Fed Interest Rate Cuts Impact Credit Cards?,” Experian
2 “Credit card interest rate margins at all-time high,” Consumer Financial Protection Bureau
3 “How Does Your Credit Score Affect Your Interest Rate?,” Experian
4 “What Is an APR and How Does It Work?,” Experian
5 “BONDS & RATES,” Wall Street Journal
6 “How Will Rising Interest Rates Impact Credit Cards?,” Experian
7 “Introduction to U.S. Economy: Monetary Policy,” Congress.gov
8 “What Is the Federal Funds Rate?,” Experian
9 “Statement on Longer-Run Goals and Monetary Policy Strategy,” fedaralreserve.gov
10 “Federal Reserve Board - FAQs,” Board of Governors of the Federal Reserve System
11 “Why Is the Federal Reserve Reducing Interest Rates?,” EveryCRSReport.com
12 “How We Conduct Monetary Policy,” The Federal Reserve Explained
13 “Monetary Policy Report – March 2024,” Board of Governors of the Federal Reserve System
14 “Banks: At the Heart of the Matter,” International Monetary Fund
15 “Monetary Policy: What Are Its Goals? How Does It Work?,” Board of Governors of the Federal Reserve System
16 “What Are Negative Interest Rates?,” Experian
Frances Coppola ispent 17 years in the financial services industry before becoming a noted writer and speaker on banking, finance, and economics. Her work appears in the Financial Times, Forbes, and a range of financial industry and other publications.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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