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Lower Interest Rates Coming? Here's What It Means for You

Sarah Cunnane
Lower Interest Rates Coming? Here's What It Means for You

The Federal Reserve has sent a signal that it's ready to start cutting interest rates, maybe as early as next month. And that could affect you in lots of ways, including when you use your credit cards and make your monthly house payment.

America's central bankers are no longer saying they'll be "patient" about making rate changes. Instead, they've wrapped up a two-day meeting with a more ominous statement about "uncertainties" that have increased -- and may require action.

A rate cut -- if and when it comes -- would be the first in over 10 years. Policymakers raised rates throughout 2018, but many analysts say the trade fight and other risks to the economy make it a good time for the Fed to start moving in the other direction.

Here's what you can expect when the Fed begins cutting.

1. Savings rates (could) drop

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Already-low savings rates could go down further.

The average interest rate on savings accounts sits at a paltry 0.1%, according to the FDIC.

That’s a very low annual percentage yield (APY). With a high-interest savings account you might land a rate close to 2%, but not much higher — especially once the Fed starts reducing rates.

But as online banks give consumers more favorable rates than ever, don’t expect savings rates to slip too much because the big banks will try to stay competitive.

If you’re after returns better than 2% annually, certificates of deposit offer higher rates. And with a robo-advisor, or automated investing service, your returns could be 5% to 10% — or higher. Consider investing some money with an automated service like Wealthsimple.

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2. Potential slack from credit cards

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Credit card rates are likely to come down if the Fed cuts rates.

Most credit card interest rates are variable and are closely influenced by what the Federal Reserve does. So, lower rates may be on the way to your wallet!

When the Fed cuts its benchmark interest rate — called the federal funds rate — banks respond by bringing down the prime rate, which is the interest rate they give to their best borrowers.

Credit card rates are typically linked to the prime. With a rate cut incoming, cardholders might see a bit of relief — with their annual percentage rate (APR) lowering after a few statements.

A rate reduction would provide welcome relief. Consumers have been plagued by the highest average APR on credit cards ever: 17.73% as of June, according to CreditCards.com. Remember, the best way to get a favorable APR is to hold an excellent credit score.

3. Many homeowners can expect a break

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Lower interest rates from the Fed will push down rates on home equity lines of credit.

Fed rate cuts will mean savings for many homeowners.

Most adjustable-rate mortgages and home equity lines of credit (HELOCs) are tied to the prime rate. If your mortgage is an ARM or if you tapped your home equity with a HELOC, you'll see your interest rate drop after the Fed starts moving and the prime starts falling.

But it may take a few months before you notice any difference in your payment amount.

Even so, avoid the temptation to go crazy on your HELOC — remember that it’s credit borrowed against your home, not free money. Defaulting on your loan repayment could have serious consequences. Like, you could lose your house.

4. Student borrowers get a gift

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If the Fed starts the interest rate dominos falling, you're likely to see your costs go down if you have student loans with variable rates. A variable interest rate — one that can change based on what other rates are doing — is an option when you take out "private" student loans offered by banks.

Meanwhile, lower rates are already on the way for federal student loans, which have fixed interest interest rates.

“The new fixed interest rates will be 4.529% on the federal Stafford loan for undergraduate students” says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com.

The rates are going down from 5.045%, and Kantrowitz says borrowers could save hundreds of dollars a year. To enjoy that rate reduction, new borrowers should consider going with a federal loan instead of a private one.

5. Car loans could slip into a lower gear

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Federal Reserve rate cuts could help put the brakes on rising interest rates for auto loans.

The average rate on a 60-month new-car loan during the first months of 2019 was 5.24%, according to Federal Reserve data. That was up more than a full percentage point from what borrowers were getting two years earlier.

The higher interest rates have contributed to record monthly car payments (though higher vehicle prices are an even bigger reason).

When you shop for a new car, make sure you do some research on rates and lenders — so you'll land the very best interest rate. Review your terms carefully, and avoid long-term auto loans.

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