The Federal Reserve is widely expected to lower its benchmark rate when it meets this week, despite the latest hotter-than-expected inflation data.
The market is now pricing in a 96% chance of a 25 basis-point rate cut this month, according to the CME Fedwatch tool.
“The betting is currently that the Fed will embark on rate cutting, concerned about burgeoning downside risks in the economy, and the job market, in particular,” Mark Hamrick, Bankrate’s senior economic analyst, said in an email.
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For Americans struggling to keep up with sky-high interest charges, a likely September rate cut could bring some welcome relief.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the rates they see every day.
From credit cards to car payments and the interest on your savings account, here’s a breakdown of what to expect when the Fed starts trimming its benchmark — and what you can do now to be in a better position to benefit.
1. Pay down high-interest debt
“Rate cuts are welcome news for Americans with debt, but one small reduction won’t make much difference when bills come due,” said Matt Schulz, LendingTree’s chief credit analyst.
With a rate cut, the prime rate lowers, too, and the interest rates on variable-rate debt — most notably credit cards — are likely to follow. But even then, APRs will only ease off extremely high levels.
“Borrowers should get some relief in the coming months, although it’s worth pointing out that interest rates are still elevated,” said Ted Rossman, Bankrate’s senior industry analyst. “Especially credit cards, which carry an average rate of 20.13%.”
That means that if the central bank cuts rates by a quarter point, it won’t have a significant impact on your credit card rate. “Existing borrowers could see their rates go down by half a point or so,” Rossman said.
Rather than wait for a small adjustment in the months ahead, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a personal loan, experts often say.
“For people who have high-interest debt — credit cards or double-digit interest on car loans — that is the priority, you want to target that as much as possible,” said Stephen Kates, a certified financial planner and financial analyst at Bankrate.
Although auto loan rates are fixed for the life of the loan, ballooning payments have become another pain point for consumers. Experts say many car shoppers could benefit from paying down revolving debt and improving their credit scores, which could pave the way to even better loan terms in the future.
2. Put your savings to work
Since rates on online savings accounts, money market accounts and certificates of deposit are also poised to go down with a Fed rate cut, experts say this is the time to secure some of the best returns available.
“Many high-yield savings accounts and CDs currently offer rates over 4% — more than 10 times the national average,” said Swati Bhatia, head of retail banking at Santander Bank.
Even once the Fed lowers interest rates, savers can still benefit from those competitive rates, especially with a CD, which allows them to lock in a higher interest rate for a set term, she said.
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A typical saver with about $8,000 in a checking or savings account could earn an additional $320 a year by moving that money into a CD or high-yield account that earns an interest rate of 4% or more, according to a recent survey by Santander Bank.
Still, many Americans keep their savings in traditional accounts, Santander found, which FDIC data shows are currently paying 0.39%, on average.
3. Consider making a big move
“The housing market would be the biggest beneficiary of lower rates as they would unlock frozen sales by homeowners who are reluctant to give up the low-rate mortgages taken out in the decade following the Great Recession,” Bob Schwartz, senior economist at Oxford Economics, said in an email.
Although mortgage rates are fixed and tied to Treasury yields and the economy, they’ve already come down significantly from their peak at over 7% back in January.
The average rate for a 30-year, fixed-rate mortgage is now just under 6.3% as of Friday, according to Mortgage News Daily.
“Over the last several weeks, the consumer sentiment around mortgages has become a little healthier, we are starting to see some nice momentum,” said John Hummel, head of retail home lending at U.S. Bank.
As more potential home buyers enter the market, that frees up more inventory, Hummel added. And, “if we see some additional rate cuts, that bodes well as we get into the later half of the year.”
4. Improve your credit score
Ultimately, across virtually all consumer products, those with better credit will qualify for the best loan terms at the lowest interest rate.
Boosting your credit score largely comes down to paying your bills on time every month, keeping balances low and only applying for credit as needed, according to Tommy Lee, senior director of scores and predictive analytics at FICO.
As a general rule, keep revolving debt below 30% of available credit and “don’t go out and open 10 credit cards,” Lee said.
You may also be able to improve your credit score by regularly checking your credit report and addressing any errors, added Schulz. “Even a single late payment on your credit report can knock 50 points or more off of your credit score, so if there’s one listed wrongly on your report, you need to get it fixed.”
That can be the difference between a “good” score, which is generally is above 670, and a “very good” score over 740, which could qualify you for the most favorable terms. (FICO scores, the most popular scoring model, range from 300 to 850.)
“It is important for people to understand that they can have a far bigger impact on their interest rates than the Fed ever will,” Schulz said.
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