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Last month, the Federal Reserve cut the federal funds rate by half a percentage point. It’s also expected to cut rates again in November. That’s welcome news for anyone who’s house hunting and planning to apply for a mortgage in the near future.

But rate changes have a widespread financial impact, including on your credit cards. After all, interest charges help card issuers pay for perks, such as those lucrative rewards programs they offer. Let’s take a look at how interest rates tie into these rewards programs and the effect that lower rates could have.

How credit card companies fund their rewards programs

You can make a lot of money from credit card rewards. For a simple example with what’s currently available, you could get a cash back card with no annual fee, a $200 sign-up bonus, and 2% back on purchases. That’s hundreds of dollars in cash back per year, without needing to pay the card issuer anything for an annual fee. How is it possible?

Card issuers fund these programs through the fees they charge. Here’s a quick summary of how it works:

• Merchants pay interchange fees on transactions. It’s normally 1% to 3% per transaction. U.S. credit card companies made $126.4 billion on interchange fees in 2022, according to Nilson Report.
• Cardholders pay interest charges and other credit card fees. Card issuers charged over $130 billion in fees to consumers in 2022, according to the Consumer Financial Protection Bureau (CFPB).

In total, credit card issuers made over $250 billion from those fees in 2022. They paid an estimated $41.1 billion in rewards, according to the CFPB. Even after paying out all those rewards, they’re still coming out ahead.

But rewards are still a pretty amazing deal for consumers who pay their credit card bills in full to avoid interest charges. If you’d like to get in on the action and start earning money back on your spending, click here to see our list of the best cash back cards and apply for one today.

Will falling interest rates affect credit card rewards?

It’d be reasonable to assume that lower interest rates mean smaller rewards opportunities. If credit card companies are making less money from interest, they might pay out less in rewards to make up for that.

Luckily, this is unlikely to happen. Most credit cards have variable interest rates, which aren’t directly tied to the federal funds rate.

Card issuers have flexibility with what they charge, so they may wait before lowering their rates. And even if they do lower rates, credit cards will still have high interest rates overall. The current average is 22.76% on credit cards that are assessed interest, according to Federal Reserve data. A half-a-percentage-point decrease certainly wouldn’t wipe out the profits that card issuers are making.

Interest rate changes also haven’t had a noticeable effect on rewards programs in the past. There have been excellent cash back and travel rewards cards available for over a decade. During that time, rewards didn’t get worse when interest rates were low or better when they were high.

Don’t let rewards opportunities go to waste

At the moment, you can save quite a bit of money with rewards credit cards. That probably won’t change because interest rates are dropping, but you never know what can happen in the future. Rewards programs aren’t guaranteed, so it’s wise to take advantage of these opportunities while you can.

If you have good credit and no credit card debt, it makes sense to get a rewards card. Pay the bill in full every month so you don’t get charged any interest, and you’ll come out ahead.

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