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Fed's Operation Twist Won't Affect Credit Card Rates

The Fed didn't raise interest rates yesterday, but it did announce its next attempt to give our lumbering economy a much-needed kick in the butt. Dubbed "Operation Twist", the Fed aims to lower long-term interest rates by selling about $400 billion in short-term government bonds and then using that money to purchase longer-duration bonds like mortgage-backed securities.  The name stems from a similar Fed effort back in 1961 when Chubby Checker's song "The Twist" was at the top of the charts.  

It kind of worked back then, so the Fed is hoping for the best this time around.

The economic theory behind the move is that by further lowering long-term rates, consumers will hopefully be more interested in taking out new home loans and businesses will want to invest more in growing their companies.  Cheaper money promotes more spending, and in turn that should help spur some economic growth.  

The problem is long-term rates are already low in the first place, and experts really don't expect the Fed's twist to push them down much more. So what's going to happen in the short-term to the interest rates on your credit cards?  Nothing.  The federal funds rate, the Fed's key lending rate which directly impacts the prime rate, will effectively remain at zero like it has since late 2008.  This means your APRs shouldn't budge since most credit cards have variable rates which track the prime rate. For those of you that carry balances on your credit cards, this is great news!  Your efforts to pay off those balances won't be hindered by making higher interest payments on the debt.

Frankly, I couldn't tell you what any of the interest rates are on my credit cards because I never pay attention to them.  I never carry balances and have never paid a red cent in interest.  That's how you should treat your credit cards too.  However, I certainly understand that there are many consumers in our country who are still struggling to pay off high-interest credit card debt.  I receive their emails and answer their questions in our Credit discussion forum every day. Regardless of how you acquired the debt, I know it's a very difficult position to be in.  

So for you, this is good news.  The Fed's "twist" shouldn't make your debt repayment process any more difficult at the moment.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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