When the Federal Reserve cuts interest rates even by just 0.25%, it will have a direct impact on your finances. While a quarter of a percent may sound small, even slight changes in rates can ripple through the economy affecting everything from credit card payments to mortgage rates (more on that later).
So why is Jerome Powell, as Chair of the Federal Reserve, choosing to lower rates right now? There are a few reasons, and they have a direct impact on everyday consumers.
Why the Federal Reserve Lowers Rates
The Federal Reserve, often called “the Fed,” sets the federal funds rate, the rate banks charge each other for overnight lending. This rate influences the cost of borrowing across the economy.
When the Fed cuts rates, its goal is to encourage more borrowing and spending to keep the economy healthy. Cheaper credit can support business growth, job creation, and consumer demand — helping to stabilize the economy.
It is not supposed to be a political decision. It is an economic tool to maintain balance between growth and inflation. The biggest impact is seen on the following:
- Mortgage Rates
- Credit card interest rates
- Car loans
- HELOCs
1. Mortgage Rates: Indirect but Important
Mortgage rates are influenced by the bond market, not directly by the Fed. They typically follow the 10-year Treasury yield. When the Fed signals lower rates, bond yields often fall, which can bring mortgage rates down over time.
Consumer takeaway:
- Homebuyers might see slightly lower mortgage rates in the coming months.
- Homeowners with adjustable-rate mortgages (ARMs) may see lower payments when their rates reset.
2. Credit Card Interest Rates: The Fastest Change
Most credit cards have variable APRs tied to the prime rate, which closely follows the Fed funds rate. A 0.25% Fed cut usually means a similar drop in your credit card APR within one or two billing cycles.
But here’s the catch:
- Even with a quarter-point drop, most credit card APRs are still over 20%, which means interest costs are still extremely high for people carrying balances.
- The relief is small compared to the overall cost of revolving credit.
Consumer takeaway:
- Minimum payments may go down slightly, but the real opportunity is to keep payments the same and pay off balances faster.
3. Car Loans and Auto Financing: A Modest Boost
Auto loan rates are affected by overall credit conditions, which improve slightly when the Fed cuts rates.
Consumer takeaway:
- Monthly payments on new loans could be a bit lower.
- If you’re already in the market for a car, you may see slightly better financing offers.
4. HELOCs: Immediate Relief
Home equity lines of credit (HELOCs) are directly tied to the prime rate.
Consumer takeaway:
- Expect your HELOC rate to drop soon after the Fed’s decision, lowering monthly payments on outstanding balances.
What This Means for ACCC Clients
At American Consumer Credit Counseling, we negotiate significantly reduced interest rates with creditors for clients enrolled in a Debt Management Plan (DMP).
- Our negotiated rates are already much lower than market rates, so a Fed cut won’t change what you’re paying on your DMP.
- However, this is a great time to consider counseling if you’re struggling with debt because credit card interest remains very high despite the Fed’s move.
Key Takeaways
- Fed rate cuts lower borrowing costs, but credit card interest rates are still painfully high.
- Mortgage rates may improve indirectly but mostly follow bond yields.
- HELOC and credit card rates will drop quickest, giving some consumers a small amount of breathing room.
- DMP rates stay the same — and remain among the lowest available, offering far more savings than a modest Fed cut.
Federal Rate Cut and Credit Card Debt
If you’re overwhelmed by credit card debt, a Fed rate cut isn’t enough to make interest manageable. That’s where nonprofit credit counseling can help.
At American Consumer Credit Counseling, we offer free, confidential sessions to help you explore your options. We only recommend a Debt Management Plan if it’s the right solution. Our negotiated interest rates are already well below market averages. Reach out to us today to learn how we can help get you debt-free.
