The Federal Reserve has cut interest rates for the first time since George W. Bush was still in the White House. 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 bank has lowered its benchmark interest rate ("the federal funds rate") by one quarter of one percentage point, a type of move we haven't seen since 2008 during the financial crisis.
Policymakers raised rates throughout 2018, and some analysts say this is the wrong time for a rate cut. But many others have said the trade fight and other risks to the economy make it a good time for the Fed to ease up a little bit. In its statement, the Fed referred to economic "uncertainties."
"Rate cuts are positive to consumers, as borrowing money becomes less costly," says Mike Rittler, general manager of retail card services and personal lending at TD Bank. "This applies to all types of loans, including unsecured loans and credit cards."
Here's a look at six specific ways you're likely to feel the rate cut — and when.
1. Savings rates (could) fall
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%, 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.
2. Potential slack from credit cards
Most credit card interest rates are variable and are closely influenced by what the Federal Reserve does. So, 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 linked to the prime, so they come down, too.
Credit card customers at TD Bank will see their rates come down in 45 days and will 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.
3. Many homeowners can expect a break
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, your interest rate should be coming down.
But it may take a few 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.
4. Student borrowers get a gift
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 have already arrived this month 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
Federal Reserve rate cuts may help put the brakes on rising auto loan interest rates.
Over the spring, the average rate on a 60-month new-car loan during the first months of 2019 was 5.36%, according to Federal Reserve data. That's more than a full percentage point higher than what borrowers were getting two years earlier.
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
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 you travel 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.