Presidents might not set interest rates, but as heads of government, they can impact the way credit cards work.
As of 2020, Americans are collectively $893 billion deep in credit card debt, according to a recent credit card debt study. Credit cards are one of the most pervasive -- and expensive -- forms of credit. Keep up with changes in the credit card market to avoid expensive mistakes.
The president-elect does have some influence on credit cards, but not necessarily in the way you'd think. Here's what you need to know.
The president-elect has limited direct influence on the Federal Reserve. In fact, none of the three branches of government can order it to take specific actions regarding monetary policy. This is by design. Insulating the central bank of the United States from political influence helps ensure that it acts in the best interest of the economy.
The Federal Reserve's mission is to support price stability and low unemployment, and it has various tools at its disposal. Namely, it can change the federal funds rate (the target interest rate set by the Federal Reserve), it can buy and sell securities, and it can change reserve requirements for banks. All of these decisions are made independently of influence from the president-elect, Congress, and the judiciary branch.
This independence comes with some caveats. The president-elect doesn't have a direct say in the decisions that Federal Reserve board members make. But the chief of state does nominate those board members -- including the Chair and Vice Chair -- who are then confirmed by the Senate, which suggests some level of influence. However, board members serve 14-year terms and each term starts two years apart. That means no single president could nominate a majority of the board.
Of course, this doesn't mean presidents haven't tried to guide the Federal Reserve, particularly when they're up for re-election. Getting the Federal Reserve to engage in monetary policy that offers a short-term boost to the economy, even if it's detrimental in the long run, could help an incumbent president.
Indeed, presidents as varied as Herbert Hoover, Harry Truman, John F. Kennedy, Lyndon B. Johnson, Richard Nixon, Ronald Reagan, and Donald Trump have all applied some level of pressure on the Federal Reserve Chair during their presidencies. That pressure could come through private meetings, criticism, or even threats of demotion. Whether or not the Federal Reserve has ever bent to presidential pressure is unknown, although its board members tend to take great pride in their independence.
Credit card interest rates are highly sensitive to changes in the federal funds rate. Typically, when the Federal Reserve increases or decreases the federal funds rate, that change is almost immediately reflected in credit card rates.
This is because credit cards are a short-term form of credit that typically comes with a variable interest rate. It's also because credit card interest rates are directly tied to the prime rate, which in turn, is tied to the federal funds rate.
The federal funds rate is the rate at which banks borrow from each other. The prime rate is the rate at which banks lend to their most creditworthy consumers. It's usually determined by adding about 3% to the federal funds rate. As we'll see below, credit card interest rates are higher than the prime rate, but they are pegged to it.
This means that when the Federal Reserve increases the federal funds rate from 0% to 0.50%, you might see a similar increase in your credit card's APR as soon as your next billing cycle. That being said, these changes -- for example, an increase from 17% to 17.50% -- are often almost unnoticeable because credit card interest rates are already so high. What's more, as long as you pay off your balance in full each month, you don't have to worry about paying any interest at all.
Banks typically add a certain number of percentage points to the prime rate to determine credit card interest rates.
This is a baseline for credit card interest rates, but there's a number of factors that influence the actual interest rate on any given credit card. Credit cards that come with lots of perks and rewards tend to have higher rates. On the other hand, credit cards from financial institutions with smaller profit margins -- such as credit unions -- often have lower rates.
Your credit card interest rate will also largely depend on your creditworthiness. Most credit cards state an APR range. When you apply for the card, the financial institution will assign you an interest rate within that range. Higher risk consumers will typically get a higher interest rate, while low-risk consumers with good credit will get a rate that's on the lower end.
The president-elect has limited say when it comes to the Federal Reserve. However, the new president will be key in terms of laws that regulate and reform the credit card industry. These can include limits on fees and interest rates as well as regulations designed to curb predatory lending practices.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, signed into law by President Obama, is one of the most impactful pieces of credit card legislation. Here are some of the features of the bill:
A whole slew of policies protect consumers from being taken advantage of by credit card companies. The president alone isn't responsible for creating or enacting these policies, thanks to our government's checks and balances. But heads of state are a key piece of the puzzle. For example, when a bill like the CARD Act is passed through Congress, the president-elect holds the power to veto a bill or sign it into law.
If you want to find the best credit card for your needs, there's a long list of features to take into account. Credit cards can come with extremely high interest rates, so if you plan to carry a balance, the APR should be close to the top of your list. It will be easier to pay off your debt if you look for the lowest rate possible and reduce your interest costs. You can even consider a 0% intro APR credit card if you can pay off your balance before the introductory period ends. If you're already paying off high-interest debt, see if you qualify for a balance transfer credit card.
However, the interest rate doesn't need to be a priority for everyone. If you're certain you'll pay off your balance in full every month, you won't be charged interest anyway, so you can focus on other features. A good rewards credit card can save you hundreds of dollars every year. Jetsetters will want to consider travel credit cards that earn airline miles and hotel points and come with lucrative travel-related benefits. Folks who prefer cash should look for a cash back credit card that matches their spending habits.
It's important to weigh any fees against the card's benefits. Annual fees, for example, can be steep, but they can also be worth it if you're earning lucrative rewards. If not, a credit card with no annual fee might suit you better. If you travel internationally, avoid cards that charge foreign transaction fees, which add up quickly.
Finally, you'll want to consider whether or not you're likely to qualify for any given credit card. Many of the best credit cards require good credit, and applying for lots of credit cards in a short time span can damage your credit. If you're having trouble qualifying for a credit card, consider a secured credit card that can help you build credit if used responsibly.
The president-elect doesn't have a direct impact on credit card interest rates, but they can influence credit cards. Most significantly, the president holds the power to sign or veto legislation that regulates the credit card industry. Such legislation can affect everything from interest rates to late fees to the time you have to pay your credit card bill.
That said, your credit cards are largely under your control. Improving your credit will help you qualify for better rates. And using your credit card responsibly will help you avoid racking up a balance or paying interest at all. Ultimately, the most important factor that affects your credit cards is you.
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