How do fed rates affect credit cards?

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Q: When rates goes down, should the interest rates decrease on our credit card bills as well? — Felicia T.

A: They should, but as you’ve no doubt noticed, they often don’t. But if your credit card lender isn’t keeping up with the latest changes in interest rates, there’s no reason to keep up your relationship with that lender.

An interest rate is nothing more or less than the current price tag on borrowed money. And just like airline seats or Bruce Springsteen tickets on eBay, the price goes up or down depending on demand. When banks accumulate deposits or borrow in volume, they pay, in effect, a wholesale price for money. Then they lend it to you and charge a retail price. As long as consumer borrowing remains strong, banks will keep that retail price as high as they possibly can.

One solution is to get a variable rate credit card, in which the bank agrees to adjust the rate every month based on a benchmark market rate like the prime rate. By some estimates, nearly half of all cards issued now carry variable rates. But, on average, you’ll pay a little more. As of last week, the average rate on a standard variable-rate card was 13.94 percent; the average rate on a standard fixed-rate card was 13.62 percent, according to

But that’s still about twice as high as the average mortgage rates. Why so high?

Your banker will tell you it’s because credit card loans are riskier. A mortgage lender can come take your house if you don’t pay back the loan. (Most mortgage lenders also quickly resell your loan to someone else after they give you the money, so they’re not even on the hook if you don’t pay.) But credit card lenders can’t exactly come and repo your latest haircut or the Chinese takeout you charged last week.

Banks also know that most people don’t bother to shop for a lower rate because of the inconvenience in opening a new account — and they’re not about to drop your rate unless you complain. So give them a call (armed with a better offer from another bank) and demand a better deal. In a survey earlier this year, the U.S. Public Interest Research Group asked a group of credit card holders to call and demand lower rates. More than half got results, cutting their rate on average from 16 percent to 10.47 percent.

If your card company says no thanks, maybe it’s time to get a new card. It may be harder than shopping for new socks, but if more people did, banks would probably be quicker to cut rates to hold onto your business. Try Web sites like , which tracks consumer interest rates nationwide. You may do better with a bank based in a state where limits are stricter on how much credit card companies can charge.

Or, if you own a home, you might consider taking out a home equity loan and use that money to pay off your credit card. Because it’s secured by your house, a home equity loan is almost always cheaper than a credit card loan. And there’s an added sweetener: you get to deduct the interest payments on a home equity loan from your income taxes.