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The Fed Cut Interest Rates Yet Again. When Will It Hit You?

Sarah Cunnane
The Fed Cut Interest Rates Yet Again. When Will It Hit You?

There they go again. For the third time in about three months, the Federal Reserve has cut interest rates — a move that's likely to have an impact on the credit cards in your wallet and maybe your monthly house payment, to name a couple of examples.

The hat trick of three straight rate cuts is the first in more than 20 years. With its latest move, America's central bank has lowered its benchmark interest rate ("the federal funds rate") by another quarter of one percentage point — to a range of just 1.50% to 1.75%.

Policymakers raised rates throughout 2018, and some experts have wondered why the Fed is cutting rates now. But many others have said the trade fight and slowing economies around the world mean the U.S. economy needs lower rates as a sort of insurance policy.

The central bank itself has cited "uncertainties."

Plus, President Donald Trump has been leaning on the Fed to push rates down.

Here's a look at six specific ways you're likely to feel the rate cut — and when.

1. Your credit card rates will go down

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Fed rate cuts have a direct impact on the rates on your credit cards.

How soon? Within weeks.

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

When the Fed cuts its federal funds rate, banks respond by bringing down the prime rate, the interest they charge their best borrowers. Credit card rates are often tied to the prime, so they come down, too.

Following a rate reduction by the central bank, credit card customers at TD Bank see their rates come down within 45 days and enjoy modest savings, says Mike Kinane, the bank's head of U.S. bankcards.

"For example, a customer with a credit card balance of $1,400 at a 14.4% rate would only see their financing charge decrease by about 30 cents each month," Kinane says.

2. Many homeowners will get a break

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Homeowners will pay lower rates on adjustable-rate mortgages and home equity lines of credit.

How soon? Within months.

A Fed rate cut means savings for lots of 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, your interest rate should be coming down.

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

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

Check today's best mortgage rates where you are.

3. Savings rates may fall

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Already-low savings rates could go down further.

How soon? Tough to say.

Lower rates from the Fed may put pressure on savings account rates.

Though the average interest rate on savings sits at a teensy-weensy 0.09%, according to the FDIC, you can find high-interest savings account with annual percentage yields (APYs) as high as 2.5%.

Banks could follow the Fed's lead and pull those rates down. 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 annual returns that are better than 2.5%, 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.

4. Student borrowers get a gift

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How soon? Possibly within months.

Thanks to the Fed, you're likely to see your costs go down if you have student loans with variable interest rates. A variable 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 already have arrived for federal student loans, which have fixed interest interest rates.

The fixed rate on a federal Stafford loan for undergrates recently fell to 4.529%, from 5.045%, according to Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com.

Borrowers have the potential to save hundreds of dollars a year, Kantrowitz says. To take advantage of the reduced rate, 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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How soon? Tough to say.

Federal Reserve rate cuts may help put the brakes on rising auto loan interest rates.

The average rate on a 60-month new-car loan is 5.36%, according to the most recent Federal Reserve data. That's more than a full percentage point higher than the average rate borrowers were getting two years ago.

The higher interest rates have contributed to record monthly car payments. (But soaring 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.

6. You may pay more when you travel abroad

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Interest rate cuts often weaken the dollar, which means higher prices for U.S. travelers overseas.

How soon? Tough to say — if it happens at all.

Interest rate cuts typically weaken the U.S. dollar, because investors often swap dollars for foreign currencies to take advantage of better interest rates in other countries.

When the dollar is weaker, exchange rates are less favorable for Americans when traveling overseas. That means you effectively pay more for meals, hotels, souvenirs and everything else, because your greenbacks don't go as far.

U.S. manufacturers like it when the buck is less robust, because that makes their products cheaper overseas and helps them sell more stuff internationally.

But the Fed's rate cut may not sap much strength out of the dollar this time, because many foreign interest rates are incredibly low. In fact, they're below zero, meaning depositors pay banks a fee to hold their money, instead of earning interest.

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