The Fed lowered interest rates – what does that mean for your credit?

On Wednesday, September 18, the Federal Reserve lowered interest rates for the second time this year, reducing their benchmark interest rate by 25 points to bring the federal funds rate down another quarter of a percent – from 2%-2.25% in July to a target range of between 1.75%-2%.   

The Federal Reserve decided to drop the interest rate again, though the committee was divided and the decision was not unanimous. The economy is in its eleventh year of growth, the job market looks positive and consumer spending is up. But the Federal Reserve felt the need to account for weakness in global economic outlook and geopolitical risks from China and Brexit, as well as uncertainty about domestic trade policy. As Federal Reserve Chair Jerome Powell noted, they “have seen additional signs of weakness abroad and a resurgence of trade policy tensions, including the imposition of additional tariffs.”

Dropping the interest rate, even as slightly as a quarter of a percent, is designed to keep inflation near the Federal Reserve’s 2% objective. They feel that this will allow the economy to continue to sustain its growth.

With two cuts to the interest rate in two short months despite heavy public criticism from President Trump, you may be wondering when the Federal Reserve might stop making cuts. That’s what Paul Kiernan from Dow Jones Newswires asked during Chair Powell’s press conference in the context of ongoing trade tension between the U.S. and China. Chair Powell answered, “I don’t have a specific stopping rule for you, but I think we’re watching carefully, and there will come a time, I suspect, when we think we’ve done enough, but there may also come a time when the economy worsens, and we would then have to cut more aggressively. We don’t know. We’re going to be watching things carefully.”

The fed funds rate sets the tone, as it were, for other interest rates like credit cards, auto loans, mortgages, home equity lines of credit, savings accounts and CDs. If the fed funds rate goes up, expect to see other types of interest rise as well. Now that the fed funds rate has gone down, well… what does that mean for your credit?

You may pay less in credit card interest

Now that the feds have lowered their benchmark interest rate, you might start to see lower credit card interest rates as well. Credit card interest is generally tied to what’s called the “prime rate,” which represents the interest rate lenders give their prime customers. If you’ve got great credit, you might be eligible for the prime interest rate. If you’ve got less than great credit, you’ll get charged interest over the prime rate.

The prime rate is tied to—you guessed it—the fed funds rate. So if the fed funds rate goes down, the prime rate goes down and your credit card interest might go down. Credit card interest reached record highs this July, so any reduction in interest, no matter how small, is to your benefit. If you don’t see any changes to your credit card interest rate, it might be time to negotiate a better APR.

You may also receive offers from credit card companies to transfer your higher-interest credit card debt to a lower-interest-rate credit card. Low-interest rate credit card offers with balance transfer incentives may be worth looking into if you are unable to pay off your credit card completely, which is always the best idea. When shopping for lower-interest-rate credit cards, be careful to read the fine print to make sure there are no hidden balance transfer fees, high annual fees or interest rate hikes after a short “trial period.”

You may earn less interest from your bank

Credit card lenders aren’t the only ones interested in the fed funds rate. Now that the benchmark interest rate is down, expect to see savings account interest drop as well. Why? Because when the feds say “it’s time to lower interest rates,” banks pay attention too.

So you’ll probably earn less interest on savings accounts, CDs and other bank products. This might be the right time to review what other banks are offering—when rates are down, it’s a good idea to make sure your money is going where it can earn the most interest. (It’s a good idea when rates are up, too.)  A short-term CDs with a locked-in interest rate may be an attractive option to protect yourself from further possible interest-rate drops.

You may pay less interest on your car loan—if you’ve got a variable rate

Auto loans also come with interest rates, and they come in two flavors: fixed and variable. Fixed interest rates are exactly what they sound like. Whatever interest rate you receive at the beginning of the car loan remains constant throughout the life of the loan, so make sure you’re happy with it.

Variable interest rates, as you can probably guess, vary. Like credit cards, which also offer variable interest rates, auto loan interest rates are ultimately linked to the fed funds rate—which means when one changes, the other usually changes too.

If you currently have a variable car loan, your interest could drop. If you’ve got a fixed loan, you’re stuck with whatever rate they offered you. However, if you’re shopping for a new car, you might get a lower interest rate on both a fixed and a variable rate loan.

Your mortgage might not be affected

Mortgage loans, like car loans, come with both fixed and variable interest rates. If you have a fixed interest rate on your mortgage, you’re not going to see any changes—but you might not see a change if you have a variable rate mortgage, either.

Why? Because mortgage interest rates are already the lowest they’ve been since 2016, for starters. Also, the mortgage interest rate isn’t tied as closely to the federal reserve benchmark interest rate. Mortgages often take their cues from the ten year Treasury yield, which is a whole different benchmark.

So if you’re in the market for a mortgage, you might be able to get yourself a good deal on the interest rate—but it might not have much to do with the Feds.

The bottom line

Now that the Federal Reserve has lowered its benchmark interest rate, expect to see consumer interest rates drop as well. This means you might pay less interest if you carry a balance on a credit card, but you might earn less interest from your savings account. 

The fed funds rate decision was designed to strengthen our entire economy, so it could also have a positive effect on stock market growth, job growth and other economic indicators. The Federal Reserve anticipates a mostly positive outlook, given current conditions. However, forecasts are informed predictions, so if the outlook changes, the Federal Reserve will act accordingly. As Chair Powell noted, “The projections of appropriate policy show that participants generally anticipate only modest changes in the federal funds rate over the next couple of years. Of course, those views are merely forecasts and, as always, will evolve with the arrival of new information.”

Shana Whitmarsh

Shana Whitmarsh is a personal finance writer who lives in Carlsbad, CA. She enjoys surfing, biking and travel with her husband and two beagles.