How the Fed’s Emergency Rate Cut Affects Your Credit Card Bill, Car Loan, Student Loan, and Mortgage

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In an emergency move yesterday, the most powerful people in the financial world, also known as the FOMC, slashed its benchmark interest rate a full percentage point to ZERO.

The benchmark U.S. interest rate is now in a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent.

This action, the most dramatic by the Fed since 2008’s Great Financial Crisis, was done to try and keep financial markets stable and make borrowing costs as low as possible as businesses around the nation close to slow the spread of the COVID-19 disease and to try and avoid the U.S. (and global) economy from falling into a recession.

This rate cut affects not only Wall Street, but Main Street as well. Especially if you have consumer debt like credit card debt, student loans, car loans and mortgages.

Let’s see how a decrease in the Fed funds rate affects each.

Auto Loans

Car LoanGot a car loan? Unfortunately, since your interest rate is already locked in for the duration of the loan, the rate cut doesn’t help you.

Thinking about getting a car loan? Probably not. At the moment, toilet paper seems to be the main priority.

Given the current circumstances, it’s probably too early to star talking about buying cars so I’ll just mention that over the years, due to rise of ridesharing services like Uber and Lyft AND brutal competition between automobile manufacturers themselves, low-interest rate financing is availabe for most creditwrothy borrowers and I don’t see this changing anytime soon.

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Auto loans usually come with 5-year terms, some even longer. With interest rates below 4.5%, depending on one’s creditworthiness.

Credit Card Debt

Credit Card DebtWere you on planning on buying that 4-year supply of toilet paper with your credit card?

That might not be such a great idea if you can’t pay off your card in full.

Based on data from the Federal Reserve, average interest rates are almost 15 percent. With the recent Fed rate hike, expect your credit card interest rates to possibly go lower.

BUT these rate reductions usually happen over several billing cycles so don’t expect a huge drop in you next month’s billing statement.

Unlike mortgages or car loans, credit cardholders are immediately affected whenever the Fed raises its benchmark rate.

Credit card interest rates are based on a bank’s prime rate, which is now at 3.25%, is usually at least 3% above the Fed’s benchmark rate.

But very few cardholders get charged the bank’s prime rate. Depending on your creditworthiness, your credit card will usually tack on a couple more percentage points on top of the prime rate.

According to the credit bureau Experian, the average balance on a credit card is now almost $6,200, and the typical American carries four credit cards.

For someone with $3,000 in credit card debt, a 1% decrease in interest rates can end up saving them a little less than $100 in interest per year.

That doesn’t sound like much but every litlte bit helps, especially since credit cards compound interest.

Mortgages

Home LoanA loan to buy a home usually have 15 to 30-year terms. Due to the longer timeline, the Fed funds rate increase has minimal effect on mortgage rates.

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What does have an effect though are bond yields. And as as bond yields have plummeted to historial lows, look for mortgage rates to follow.

When Treasury yields fall, banks charge lower interest rates for mortgages.

If you already have a mortgage, your interest rate is usually already “locked” in for the duration of the loan so for you….it’s all good in da hood.

But if you’re looking buy a new home, have a home equity line of credit (HELOC), or have an adjustable rate mortgage (ARM), then you will see lower rates going forward.

The average fixed rate for a 30-year mortgage rose to 3.36% last week, according to Freddie Mac. That’s almost a full percentage point lower than 4.31% a year ago.

Just because the benchmarke interest rate dropped by 1% doesn’t neccessarily mean the average mortgage rate will drop by the same amount.

The mortgage lending industy and how they set rates is not that simple but if the U.S. government want to encourage more home buying in the near future, I do expect mortgage rates to fall.

Student Loans

Student LoanIf you have a student loan with a fixed-rate government loan, you’re in luck. It has nothing to do with the Fed’s rate cut but last Friday, Trump announced that he’s waiving interest on all student loans held by federal government agencies.

Student loans are tied to the 10-year Treasury note, not the federal funds rate. And the interest rate on the 10-year Treasure note has actully been falling to historial lows lately.

Currently, the 10-year Treasury yield is around 0.815%. If the yield on the 10-year Treasury drops all the way to zero, new loans to undergraduates would be 2.05%, graduate students would pay 3.6%, and the rate on parent PLUS and grad PLUS loans would be 4.6%.

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But if you have a non-government loan with a variable rate, your loan is about to get less expensive.

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