When interest rates start falling, it’s a bit of good news and potentially some bad news for your money.
That’s because the Federal Reserve, the bank that sets monetary policy, tends to lower its key rate (known as the federal funds rate) when it feels the economy needs a nudge. During the Great Recession, for example, the Fed dropped its key rate essentially to zero, which made it incredibly inexpensive for businesses and consumers to borrow money, spend it and, in turn, spur economic growth. The opposite tends to be true when the economy is growing robustly. In that scenario, the Fed often raises interest rates – as it did throughout 2018 – to prevent the economy from overheating and keep price inflation in check.
Whether up or down, when the Fed adjusts rates it’s big news because it sends ripples throughout the economy – including your finances. Here are a few things to consider when interest rates decline.
TACKLE CREDIT CARD DEBT
The amount of interest charged to outstanding balances on your credit card typically tracks the federal funds rate as it moves up and down (but it’s not the only factor), so if you have a variable-rate credit card you’re probably going to get a break – a relatively small one, to be fair – on those charges.
Credit card interest rates are currently at record highs, so any reduction in those costs will help you pay your balance off quicker. If you’re focused on paying off debt, it’s usually a good idea to tackle high-interest credit card balances first. Need a little inspiration? Here’s how one couple paid off $22,000 in debt in just three years.
TAKE A LOOK AT YOUR SAVINGS ACCOUNT
If you’ve tucked money into a high-yield savings account, don’t be surprised if the interest rate you earn falls when, or even before, the Fed drops its rate. Just like credit cards, the interest you earn on savings tracks that federal funds rate, which means the interest you earn will fall in proportion to the amount the Fed cuts. If your money is held in a basic savings account with a traditional bank, you probably won’t notice much of a change as they already pay rock-bottom interest rates whether they’re rising or falling – the national average is 0.28 percent.
CHECK LOAN INTEREST RATES
If you’ve been on the fence about a big home renovation project (perhaps that’s literally installing a fence) or you need to borrow money for any other personal endeavor, it’s a good time to do it while rates are falling. Most home equity lines of credit (HELOCs) track the fed funds rate, so any announced rate cut should show up in HELOCs within 30 to 60 days. A quarter-point reduction on a $60,000 home equity line of credit would shave the monthly payment by $12.50.
If you’re exploring all your borrowing options, variable-rate personal loans also get a little cheaper when rates fall. If you already have a loan outstanding, it might be an opportune time to refinance and lock in lower interest costs – just keep tabs on any refinancing fees to ensure you’re still coming out ahead.
CHECK MORTGAGE RATES
The rates on adjustable-rate mortgages won’t immediately benefit when the Fed drops rates because these loans are modified annually, which means you won’t feel the impact of the Fed until your next annual loan adjustment. But if rates keep falling, you’ll see those reflected in one fell swoop at that time.
STAY ON TRACK WITH STUDENT LOANS
You’ve probably noticed a theme here: falling rates are good for borrowers, less so for savers. If you have a variable-rate, private student loan, you’ll get a little relief whenever the Fed announces a cut – so long as you’re on a regular payback schedule. If you are on an income payment plan, your monthly minimum payment is fixed and won’t change.
The interest rates on Federal student loans are set every year by the Department of Education and they are tied to the yield on 10-year Treasury bonds. That means there isn’t really a direct link between the Fed’s actions at the rate on Federal student loans.