Will credit card debt forgiveness be worth it when the Fed cuts interest rates?

Between today's high-rate environment and high average balances, many Americans are struggling to get their credit card debt under control. After all, the average person owes about $8,000 on their credit cards at a time when the average credit card rate is hovering near 24%. That combination can result in serious credit card debt issues. And when you factor in inflation (and other economic challenges), it's easy to see why so many people are struggling to pay off what they owe. 

But while the high-rate environment is having a big impact on people's finances, that could change soon. All signs point to a Fed rate cut being on the horizon in September, and when that rate cut happens, it's likely to have an impact on card rates, too. That, in turn, could provide some relief to those who are carrying a balance from month to month. 

How much relief will a Fed rate cut provide, though? And is it enough to negate the benefits of certain types of debt relief options, like credit card debt forgiveness — which could result in your card issuers forgiving a significant portion of your current balance? Below, we'll break down what to know.

Find out more about debt forgiveness (and your other debt relief options) here.

Will credit card debt forgiveness be worth it when the Fed cuts interest rates?

While the prospect of Fed rate cuts might seem like a reason to hold off on pursuing debt forgiveness, this approach may still be worthwhile for many cardholders. 

For starters, it's important to understand that changes in the Federal Reserve's benchmark rate don't translate directly or immediately to credit card interest rates. While there is a correlation, the relationship is not one-to-one. 

Credit card annual percentage rates (APRs) are instead tied to the prime rate, which closely follows the Fed's federal funds rate. However, there tends to be a lag between the Fed slashing rates and credit card rates decreasing for consumers. And, when the card rate reductions do happen, they could be less substantial than the Fed's actions might suggest.

But that's not the only factor at play. Right now, credit card rates are closing in on historic highs, the first Fed rate cut is likely to be just 0.25%, which wouldn't translate to much in terms of savings for cardholders. But even a significant cut by the Fed is unlikely to bring rates down to levels that would provide meaningful relief for those carrying large balances. 

For instance, if the average rate dropped from 24% to 20% — a substantial decrease — many cardholders would still find themselves struggling with the weight of their debt. And, the compounding nature of credit card interest means that even at 20%, balances can grow rapidly if only minimum payments are made.

Another crucial factor to consider is the time value of money and the opportunity cost of waiting. While Fed rate cuts might eventually lead to some reduction in credit card rates, this process can take months. During this waiting period, cardholders continue to accrue interest at current high rates, potentially adding thousands of dollars to their overall debt burden. 

In contrast, initiating the credit card debt forgiveness process now could lead to immediate negotiations with creditors. That, in turn, could result in significant reductions in the total amount owed.

Wondering about the debt relief options available to you? Learn more here.

Benefits of pursuing credit card debt forgiveness 

If you're unable to afford your current credit card debt, pursuing credit card debt forgiveness could offer you a few different benefits, including:

Substantial debt reduction

Debt settlement companies may be able to negotiate with your creditors to reduce the total amount owed by 30% to 50% or more in some cases. In an environment of exceptionally high interest rates, this level of debt reduction can provide far more significant savings than waiting for a potential rate decrease.

A fixed repayment timeline

Unlike the open-ended nature of making minimum payments on credit cards, debt settlement programs typically offer a clear timeline for becoming debt-free, often ranging from 24 to 48 months. 

Protection against future rate increases

While Fed rate cuts are currently anticipated, economic conditions can also change rapidly. By settling your debts now, you can protect yourself against the possibility of future rate hikes, which could make your credit card debt even more unmanageable.

Potential for improved cash flow

As credit card debt settlements are reached and your debts are resolved, you could find yourself with improved monthly cash flow. This can be particularly beneficial in the current economic climate.

The bottom line

While the prospect of Fed rate cuts may seem like reason enough to delay taking action on your credit card debt, the reality is that for many cardholders, debt forgiveness may still offer the most effective path to financial relief. The potential for a substantial debt reduction, coupled with the benefits of a structured repayment plan and improved financial management, can outweigh the speculative benefits of waiting for rate decreases that may be modest and slow to materialize.