By Mike Lazear: PICurrent Assistant Producer
Throughout the past few months as markets have struggled, the Fed has cut it’s interest rates multiple times in an effort to stop the meltdown. Now, two weeks after one of the largest market slides in quite awhile, the Fed is expected to cut the rates even more.
It’s possible the interest rate could fall to as low as 0.5 percent in December, which would be the lowest rate we’ve seen since the rate began in 1954. Yikes.
What does this mean for you?
The fed rate is what it charges banks for short-term loans, making it cheaper for banks to borrow from one another.
This could allow for a greater flexibility in lending and borrowing. If this happens, it will be easier for you to take out loans and open new accounts. Especially credit cards and car loans.
In time, you may find that your credit cards get a bit more manageable. You may also find an increase in your credit limit. However, recent history has shown that rate cuts have not slowed down the financial meltdown for long.
In reality, you should still focus on being frugal and treating your credit cards and loans with the same aggressiveness as before. It is never a “good” thing to carry a balance! If you do get a credit-limit increase, just think of it as an extra safety-net.
On the down side, rate cuts tend to drop the amount of interest you earn on saving accounts and other investments like Certificates of Deposit (CD). Many high-yield savings accounts might see their annual-period yield (APY) percentages fall even further.
In summary this means:
- If you carry a credit-card balance, you should continue to aggressively pay it off
- It will be easier to obtain credit, and there may be increases in account limits for borrowers
- Certificate of Deposit and High-Yield savings account owners will see their rates affected
Note that there could be a lag time of up to three months before the lower rates start to affect credit card holders.
The lower interest rate should not affect mortgages too much. In general, homeowners can expect more of the same. Interest rates will be fairly stable, so thoughts of refinancing just because of a potential new rate may not be the best idea.
If you are looking to refinance, look for other reasons to do so, such as:
- You have the ability to get an interest rate that is at least full percentage point lower than your current one
- You plan to stay in your home for awhile
- There is chance for you to get out of a financial situation that is not working well
Whether these interest rate cuts will help turn the economy in the right direction remains to be seen, but always keep your own financial picture in mind first. Every situation is slightly different. With a bit of planning, you can work towards a picture of financial health.
For More:
USA Today on the Effect of the First Rate Cut
How the Rate Cuts Affect Credit
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