erest they charge their best customers. Thus, when consumers hear that the short-term interest has been hiked, it often means an accompanying hike in the prime rate and in credit card interest rates “Most credit cards charge a certain number of percentage points above the prime rate. When the Federal Reserve boosted short-term interest rates last week, banks nudged the prime rate up to 9.5%. If your credit card charges 10 percentage points above prime, you’ll soon be paying 19.5% interest on your unpaid balance.”
Often credit cards have variable rates which means that they are directly proportional to the prime rate which, in turn, is directly proportional to the short-term interest rate set by the Fed. If the prime rate escalates due to escalation in the short-term interest rate, then credit card interest rates escalated along with them. From this discussion, many might think that a drop in the short-term interest rate will have an opposite affect on credit card interest rates. In other words, a drop in the short-term interest rate will cause subsequent drops in the prime rate and credit card interest rates. However, this is often not the case.
The Professor of Economics at George Washington University, Robert Dunn, explains the minimal impact on credit card interest rates due to a drop in the short-term interest rate that was enacted in 1995. As he explains, the drop means little to credit card holders “For credit card debt, not much, because the credit card interest rates do not respond terribly much to market yield. You would probably see a decline in mortgage interest rates, a little one, but the big interest rates that people pay month in and month out are credit card debts, and I don’t think those will change much.”
From the above discussion of the insignificant impact of short-term interest rate declines on credit card interest, we see that declines do impact individuals when it comes to mortga...