Bariatrx

Menu

Skip to content
  • Home
  • Categories
    • Alzheimer’s & Dementia Medication
    • Elderly Personal Care
    • Hospital Marketing Tips
    • Medical SEO Guide
    • Senior Health Care
    • Senior Home Care Tips
    • Skilled Nursing Care
  • About
  • Contact
  • Privacy Policy

What Does a Fed Rate Cut Mean for My Finances?

Home / Budgeting / What Does a Fed Rate Cut Mean for My Finances?
February 10, 2021 by Liam Lane

How to make smart financial decisions in a low interest rate environment.*

The Federal Reserve, a.k.a. the Fed, was in the news for more than a decade for raising the federal funds rate. But the headlines have changed. In July 2019 the Fed finally cut its benchmark interest rate. The Fed raises or lowers the federal funds rate to influence the direction of the U.S. economy toward strong employment and stable inflation.

Alright, this may all seem pretty high level. It’s just a bunch of news for policymakers, economists and investors playing the market. Right? Not so fast. While it may sound like a fancy finance term, the federal funds rate is the interest rate banks charge each other to lend funds overnight. When that rate goes down (or up), the effects trickle down to you and the financial products you use every day—think credit cards, loans and savings accounts.

What happens when the Fed lowers rates? You could see the effects trickle down to the financial products you use every day.

Even if you don’t typically follow financial headlines, understanding what happens when the Fed lowers rates can help you make smart financial decisions when it comes to borrowing, saving and spending. Read on to answer the question: What does a Fed rate cut mean for my finances?

What goes up and what comes down when the Fed cuts rates

What happens when the Fed lowers rates? One of the Fed’s goals with a rate cut is to make borrowing less costly. Translation: You could see lower interest rates on credit.

Economist and podcast host John Norris says that a Fed rate cut could actually be helpful to the average consumer. “If history serves as a guide, the prime rate will fall by the same amount as the Fed’s actions,” Norris says. “This means credit cards and home equity lines of credit (HELOCs) will be a little cheaper for consumers moving forward.” The prime rate, which is based on the federal funds rate, is the interest rate lenders charge their most creditworthy customers.

You might feel how a lower Fed rate impacts you if the prime rate also falls, making it cheaper to borrow money for big purchases.

Broken down simply, here’s how a lower Fed rate impacts you and the various types of credit you may already have or be considering:

  • Credit cards: “Credit cards are almost exclusively variable APR,” says Greg Mahnken, analyst at Credit Card Insider. “This means that as the prime rate goes up and down, the interest rate of the card will fluctuate as well. Your card issuer must tell you the margin rate—that’s the margin added to the prime rate to get your credit card’s APR,” Mahnken explains. If you’re wondering how a lower Fed rate impacts you and your cards, you could be charged less to carry a balance and may see smaller minimum payments.
  • Mortgages: What happens when the Fed lowers rates? For mortgages, it depends on the type of loan. The rate could drop on adjustable-rate mortgages, for example, meaning a reduced monthly payment. How a lower Fed rate impacts you could be different for a fixed-rate mortgage. This type of mortgage may not be as directly impacted by a Fed rate cut and is influenced by other factors.
  • Home equity lines of credit: If you have a HELOC or are in the market for one for home repairs, you could see a rate decrease following a Fed rate cut, lowering monthly payments.
  • Other loans: If you’re wondering how a lower Fed rate impacts you, know that it could influence lower rates on auto loans for car owners, but factors including industry sales and financing offers also come into play. If you have a private student loan and a regular payment schedule, you could see a lower monthly payment.

Now, what does a Fed rate cut mean for my finances when it comes to saving? Savers could see interest rates decline on deposit accounts like savings accounts, money market accounts and certificates of deposit (CDs). A lower interest rate here means you’ll earn less in interest on your savings balances.

“Banks make money by making a spread between what they pay for deposits and what they charge on loans,” Norris says. “When what they can charge on a loan goes down, it makes sense what they pay on deposits will eventually do so as well.”

How to manage a rate cut as a borrower, saver and spender

What does a Fed rate cut mean for my finances is only half of the puzzle. The other half is determining how to manage your finances in a lower rate environment so you can achieve your financial goals. Follow these tips when you consider how a lower Fed rate impacts you for borrowing, saving and spending:

If you’re borrowing:

  • Look for lower rates on new credit cards: “Credit card users should always be on the lookout for lower variable rate formulas, and a rate cut or two is a perfect time to do a little homework when looking for new cards,” Norris says.What happens when the Fed lowers rates? You may see lower rates on credit cards and certain types of loans.
  • Ask for lower rates on existing credit cards: When you’re learning what happens when the Fed lowers rates, consider that negotiating better rates on borrowed money could be easier in a lower interest rate environment. For example, you can check with your credit card issuers to see if you can get a lower interest rate on the credit cards you have already.
  • Refinance high-interest debt: “If your issuer/lender won’t lower your interest rate despite a cut to the Fed/prime rate, look into refinancing or consolidating your debt with a lower-interest loan,” Mahnken says.

If you’re saving:

  • Find a competitive savings account rate: Even though lower rates on savings is often what happens when the Fed lowers rates, banks could still offer competitive savings rates. For instance, online banks can often pass savings on in the form of higher interest rates on their deposit accounts because they save money by not maintaining brick-and-mortar locations. Discover, for instance, offers a high-yield savings account with an interest rate over 5x the National Savings Average.1 So while rates may go down on average, you can possibly earn a higher interest rate on your savings than you had in the past with a high-yield account.

You earned it.
Now earn more with it.

Online savings with no minimum balance.

Start Saving

DiscoverOnline
Savings

Discover Bank, Member FDIC

  • Lock in a higher fixed rate: If you anticipate more Fed rate cuts in the future, then explore savings vehicles with a rate that you can lock in. With a fixed-rate certificate of deposit, for example, the CD rate is fixed for the entire term. If you open a 5-year CD, your savings will continue to earn the same interest rate despite rate cuts. Note that CDs often come with an early withdrawal penalty if you withdraw your funds before the end of the account’s term, so they’re best used for savings you won’t need to touch for a set period of time.

If you’re spending:

  • Decide to buy, but do it wisely: Since one answer to “What does a Fed rate cut mean for my finances?” is that borrowing costs less, it could make sense to go ahead with that large purchase you’ve been planning for ages. “When it comes to spending, lower interest rates can encourage bigger purchases, such as home improvements, cars and homes,” Mahnken says. “But before making a big-ticket purchase, make sure you have a budget so you can see how the purchase will affect your monthly cash flow.”
  • Pursue a passion that requires capital: If you can get access to borrowed money at lower rates, some of your personal goals that require credit could be more achievable. Maybe you’ve been preparing to start a business endeavor or pursue higher education to advance your career. Now could be the time to set things in motion.

Fed rate cut or not, there’s always room for financial improvement

Even if financial news isn’t your thing, paying attention to trends like a Fed rate cut (or hike) can help you manage your money most effectively. Despite the interest rate climate, though, it’s still important to remain disciplined in your financial strategy. This includes setting financial goals, creating a plan to reach them and educating yourself on tools and methods that can help you in the process. Whether interest rates are low or high, you’ll always win with this approach.

* This should not be considered tax or investment advice. Please consult a financial or tax advisor if you have questions.

1 The Annual Percentage Yield (APY) for the Online Savings Account as of 02/01/2021 is more than five times the national average APY for interest-bearing savings accounts with balances of $500 as reported by Informa Research Services, Inc. as of 02/01/2021. Interest rates and APYs are subject to change at any time. Although the information provided by Informa Research Services has been obtained from the various institutions, accuracy cannot be guaranteed.

Source: discover.com

This entry was posted in Budgeting, Home, Money Basics and tagged 5-year CD, Auto, Auto Loans, Banking, big, borrowing, Budgeting, Buy, car, cars, CD, CDs, Credit, Credit Card, credit cards, Debt, deposit, Education, employment, existing, Federal Reserve, Finance, Financial Education, Financial Goals, Financial Wize, FinancialWize, High-yield Accounts, Home, Home Projects, How To, industry, Interest Rates, investment, Loans, Make, Make Money, market, money, Money Market, money market accounts, Money-saving Tips, More, Mortgage, mortgages, Moving, News, Online Savings Account, Paying Down Debt, Personal, planning, Podcast, Products, Purchase, Rates, refinancing, save, Save Money, Saving, savings, Savings Account, savings accounts, Savings Tips, Spending, tax, trends, vehicles. Bookmark the permalink.

Post navigation

← What Can a Landlord Deduct From Your Deposit? A Primer for Current and Former Renters
50/30/20 Budgeting Rule: How to Use It [Instructions + Calculator] →

Home

About

Contact

Privacy Policy

Site Map

Categories

  • Account Management
  • Adult Nursing Home Guide
  • Alzheimer's & Dementia Medication
  • Apartment Communities
  • Apartment Decorating
  • Apartment DIY
  • Apartment Hunting
  • Apartment Life
  • Auto
  • Auto Insurance
  • Auto Loans
  • Banking
  • Breaking News
  • Budgeting
  • Building Credit
  • Business
  • Car Insurance
  • Careers
  • Cash Back
  • Celebrity Homes
  • Checking Account
  • Cleaning And Maintenance
  • College
  • Credit 101
  • Credit Card Guide
  • Credit Card News
  • Credit Cards
  • Credit Repair
  • Crime and Safety
  • Debt
  • DIY
  • Early Career
  • Education
  • Elderly Personal Care
  • Estate Planning
  • Extra Income
  • Family Finance
  • Financial Advisor
  • Financial Clarity
  • Financial Freedom
  • Financial Planning
  • Financing A Home
  • Find An Apartment
  • Finishing Your Degree
  • First Time Home Buyers
  • Fix And Flip
  • Flood Insurance
  • Food Budgets
  • Frugal Living
  • Growing Wealth
  • Health Insurance
  • Home
  • Home Buying
  • Home Buying Tips
  • Home Decor
  • Home Design
  • Home Improvement
  • Home Loans
  • Home Ownership
  • Home Repair
  • Hospital Marketing Tips
  • House Architecture
  • Identity Theft
  • Insurance
  • Investing
  • Investment Properties
  • Life Hacks
  • Life Insurance
  • Loans
  • Luxury Homes
  • Making Money
  • Market News
  • Medical SEO Guide
  • Minimalist LIfestyle
  • Money
  • Money Basics
  • Money Etiquette
  • Money Management
  • Mortgage
  • Mortgage News
  • Mortgage Rates
  • Mortgage Tips
  • Moving Guide
  • Paying Off Debts
  • Personal Finance
  • Personal Loans
  • Pets
  • Podcasts
  • Real Estate
  • Refinance
  • Renting
  • Retirement
  • Roommate Tips
  • Saving And Spending
  • Savings Account
  • Selling A House
  • Senior Health Care
  • Senior Home Care Tips
  • Side Gigs
  • Skilled Nursing Care
  • Small Business
  • Spending Money Wisely
  • Starting A Family
  • Student Finances
  • Student Loans
  • Taxes
  • Travel
  • Unemployment
  • Unique Homes
  • Work From Home

Recent Posts

  • Business Owner or JOB Owner?
  • Podcast: Insurance For Homeowners and Real Estate Investors
  • Should I Take Less for My Car Just to Get Rid of It? (Hour 3)
  • How I Travel Full-Time By RV And Boat With My 2 Dogs
  • How Interest Rate Hikes Affect Personal Loan Investors – SmartAsset

Tags

away big budget Buy Buying car Credit Credit Card credit cards Credit Score Debt estate Family Fees Finance FinancialWize Financial Wize Home house How To Insurance Interest Rates Investing keep Life Loans Main Make market money More Mortgage News Personal personal finance Products Purchase real Retirement save Save Money Saving savings Spending tax
Bariatrx
Home | Contact | Site Map
2019 Copyright. Bariatrx