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The Fed cut interest rates but some credit card APRs haven’t gone down

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Why some APRs are still rising

Synchrony and Bread Financial, which both issue store-branded credit cards, have said that the moves were necessary following a Consumer Financial Protection Bureau rule limiting what the industry can charge in late fees.

“One of the unintended consequences of trying to impose limits on fees is that it often leads to higher rates,” said Greg McBride, chief financial analyst at Bankrate.com.

Card issuers are mitigating their exposure against borrowers who may fall behind on payments or default, he said.

“Reducing the late fee doesn’t reduce the likelihood of a late payment so issuers are going to compensate for that risk in another fashion.” McBride said.

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“It doesn’t surprise me that card issuers would try and get out in front of these changes,” said Matt Schulz, LendingTree’s chief credit analyst. The CFPB’s new rule takes a bite out of what has been a very profitable business.

Further, “stores want to be able to offer that card to anyone who walks up to the checkout counter and there is a fair amount of risk in that,” Schulz said.

How to avoid paying sky-high interest

Only consumers who carry a balance from month to month feel the pain of high APRs. And higher APRs only kick in for new loans, not old debts, as in the case of new applicants for store cards or new purchases.

“Rates are not going up on an existing balance,” McBride said.

APR changes only affect the whole balance if the change is due to a change in the underlying index, such as an increase or decrease in the Fed’s benchmark, he explained.

“Otherwise, if the issuer wants to raise the rate — which would mean increasing the margin over prime rate — they can only do so on an existing balance if the cardholder is 60 days delinquent,” McBride said.

However, credit card delinquency rates are already “elevated,” with 8.8% of balances transitioning to delinquency over the last year, and the share of borrowers with revolving balances rising as more people rack up new debt over the holidays.

Currently, Americans owe a record $1.17 trillion on their cards, 8.1% higher than a year ago, according to the Federal Reserve Bank of New York.

McBride advises consumers against signing up for a store credit card with a high rate during the peak shopping season.

“Store cards are so popular this time of year,” he said. “Having that same-day discount dangled in front of you is tempting, but you lose the benefit of the discount really fast if you start carrying a balance.”

As a general rule, “the best way to avoid these sky-high rates is to pay your bill in full every month — that is easier said than done, but should always be the goal,” Schulz said.

Cardholders who pay their balances in full and on time and keep their utilization rate — or the ratio of debt to total credit — below 30% of their available credit, can also benefit from credit card rewards and a higher credit score. That paves the way to lower-cost loans and better terms going forward.

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Personal Finance

How to leverage the higher 401(k) plan contribution limit for 2025

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If you’re eager to save more for retirement, it’s not too early to boost 401(k) plan contributions for 2025, financial experts say.

For 2025, you can defer up to $23,500 into 401(k) plans, up from $23,000 in 2024. For workers age 50 and older, the 401(k) catch-up contribution remains at $7,500 for 2025.

But there’s a “super funding” opportunity for 401(k) catch-up contributions for a subset of savers, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

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Enacted via Secure 2.0, the 2025 catch-up contribution limit will increase to $11,250 for employees ages 60 to 63, which brings the 401(k) deferral total to $34,750 for these investors.  

“Probably no one knows about the extra increase,” and it could take time before the general public is aware of the new opportunity, said Boston-area CFP and enrolled agent Catherine Valega, founder of Green Bee Advisory.

However, boosting contributions later could still be beneficial for savers in this age range, experts say.

Increase 401(k) deferrals for 2025 now

If you plan to adjust 401(k) deferrals for 2025, “now is the time to be doing it,” Valega said.

Typically, it takes a couple of pay periods for 401(k) contribution changes to go into effect, and you could miss some higher contributions in January by waiting, she said.

If you miss bigger deposits early, you can still max out your plan by boosting deferrals later in the year. But higher percentages can “impact cash flow more than people are typically willing to do,” Valega said. 

Lucas said he updated next year’s 401(k) contributions for his clients in early December.

“It’s already set for next year,” he said. “We’re on pace, starting with the first payroll.”

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Of course, many workers can’t afford to max out their 401(k) plan every year.

Roughly 14% of employees maxed out 401(k) plans in 2023, according to Vanguard’s 2024 How America Saves report, based on data from 1,500 qualified plans and nearly 5 million participants.

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Student loan forgiveness chances lost to those who refinance: CFPB

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With the Federal Reserve’s recent moves to lower interest rates — and further cuts on the horizon — some federal student loan borrowers are wondering if now is a good time to refinance.

“We are already seeing more borrowers tempted to refinance their federal loans,” said Betsy Mayotte, president of The Institute of Student Loan Advisors.

Refinancing your federal student loans turns them into a private student loan and transfers the debt from the government to a private company. Borrowers usually refinance in search of a lower interest rate.

But the Consumer Financial Protection Bureau has new warnings about refinancing student debt.

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In a report published Monday, the CFPB said that private lenders use “deceptive” practices in their marketing and disclosure materials, misleading student borrowers about a key pitfall of refinancing: Those who do so lose access to federal student loan forgiveness options.

“Companies break the law when they mislead student borrowers about their protections or deny borrowers their rightful benefits,” said CFPB Director Rohit Chopra. “Student loan companies should not profit by violating the law.”

Federal forgiveness chances dashed with refinancing

Some private lenders give the wrong impression “that refinancing federal loans might not result in forfeiting access to federal forgiveness programs, when, in fact, it was a certainty,” the CFPB report says.

The federal government offers a range of student debt forgiveness programs, including Public Service Loan Forgiveness and Teacher Loan Forgiveness.

PSLF allows certain not-for-profit and government employees to have their federal student loans cleared after 10 years of on-time payments. Under TLF, those who teach full-time for five consecutive academic years in a low-income school or educational service agency can be eligible for loan forgiveness of up to $17,500. These options are not available to private student loan borrowers.

Borrowers refinancing would also not be eligible for one-off forgiveness efforts like President Joe Biden’s Plan B.

Private student loan borrowers who are struggling to pay their bills don’t have a right to an income-driven repayment plan, either.

IDR plans allow federal student borrowers to pay just a share of their discretionary income toward their debt each month. The plans also lead to debt forgiveness after a certain period.

Borrowers who refinance their student loans lose access to these federal relief options, the CFPB said.

And this has cost borrowers.

“The lenders profited from borrowers paying the full amount of their loans, when the borrowers otherwise potentially could have had some or all of those loans forgiven,” the bureau wrote in its report.

Lenders do inform borrowers of what benefits they may give up by making moves like refinancing, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for student loan servicers.

Buchanan said the government’s changing promises around student loan forgiveness has led to a lack of clarity. (Republican-led legal challenges have stymied the Biden administration’s efforts to deliver wide-scale student loan forgiveness to borrowers.)

“That volatility and confusion is something the Bureau needs to take up with the Department of Education,” Buchanan said.

But the federal government’s long-standing student loan forgiveness programs and other relief measures are reasons alone to think twice before refinancing, Mayotte said.

“We almost always very strongly recommend against it,” she said.

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Personal Finance

Advisors remain reluctant to recommend crypto, even as prices soar

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Financial advisors take on crypto: Here's what to know

Digital assets have rallied since the November U.S. election — with bitcoin notching a new high above $107,000 on Monday — and continue to gain ground as President-elect Donald Trump details his pro-cryptocurrency policy plans. 

Still, many financial advisors remain wary. 

“As traditional long-term planners, we currently do not incorporate crypto in our portfolio allocations,” said certified financial planner Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Florida. She is also a certified public accountant. “We always advise our clients to put in crypto what you’re not necessarily needing for retirement, what you’re comfortable losing.”

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To be sure, regulatory uncertainty remains a clear area of concern for financial advisors when it comes to recommending crypto investments to clients.

In April, when crypto prices were lower, an annual survey of 2,000 financial advisors by Cerulli Associates found that 59% don’t currently use cryptocurrencies or plan to in the future. Another 26% said they don’t use it now but expect to in the future. 

Meanwhile, about 12% of advisors said they use cryptocurrencies based on clients’ requests, according to the Cerulli report, and less than 3% of advisors said they use crypto based on their own recommendations.

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Lawrence recommends clients interested in crypto limit the allocation to no more than 1% to 5% of their overall portfolio.

Most financial advisors agree that whether to have crypto investments in your portfolio depends on your risk tolerance, financial goals and time horizon.

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