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It's time to switch to variable rate credit cards in the wake of another, unexpected cut in interest rates. Yesterday, the Federal Open Market Committee cut short term interest rates by half-a-point, which forced banks to cut the prime rate to 7.5% today. As a result of the cuts so far this year, the prime rate has dropped by two full percentage points. Therefore credit cards pegged to the prime have been dropping like a rock. Currently the average offered rate on a variable credit card is 14.66% compared to a 16.04% offered APR for a fixed rate card. One year ago fixed rates cards averaged 15.11% and variable rate cards averaged 16.09%. Most variable rate credit cards are based on either the prime rate or LIBOR rate. With most bank credit card issuers adjusting credit card rates monthly, many consumers have already watched their APRs drop. Issuers adjusting rates quarterly are now passing along previous rate cuts this month. Yesterday's action will affect some credit card accounts during the May billing cycle, while others will have to wait till the July billing cycle to benefit from today's unexpected rate cut. American consumers currently owe $666 billion on all credit cards. About $568 billion of this debt is owed on major cards such as VISA, MasterCard, American Express and Discover. Approximately $98 billion is owed on retail or store credit cards. Nearly half of all credit cards in the U.S. have variable interest rates. Three years ago, about three quarters of credit cards had variable rates. Many top issuers have since switched to fixed APRs for new cardholders. Nevertheless with 80% of total credit card debt subject to finance charges and with 50% of these charges linked to variable rates, Americans will save $1.2 billion, annually, as a result of yesterday's Fed action. However since short term interest rates have declined so dramatically since the start of this year it is very likely that even fixed interest rates on credit cards will be impacted. If fixed rates drop the savings could exceeded $3.0 billion as a result of yesterday's rate drop. Combined with the January rate decreases, American consumers may save as much as $9.0 billion in interest charges this year compared to 2000. For the average household the savings so far will amount to about $90 per year.
