A customer shops for school supplies as employees restock shelves at a Target store in Queens, New York.
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Now, as central banks meet again in September and prepare to cut interest rates for the first time in years, consumers may also start to see borrowing costs fall. And in some cases, that’s already happening.
The federal funds rate, set by the US central bank, is the interest rate that banks lend and borrow from each other overnight. While it’s not an interest rate paid by consumers, the Fed’s actions still affect the borrowing and savings rates that consumers see every day.
“While this first rate cut won’t make a huge difference to people’s wallets, it will be the start of a series of rate cuts over the rest of this year and into next year,” House said.
This could push the Fed’s policy interest rate, the federal funds rate, below 4% by the end of next year from its current range of 5.25% to 5.50%, some experts say.
From credit card and mortgage rates to auto and student loans, here’s a look at what your monthly interest expenses could look like as the first interest rate cuts approach.
credit card
Most credit cards have variable interest rates, which are directly tied to the Fed’s benchmark. Following the rate hike cycle, the average credit card interest rate has risen from 16.34% in March 2022 to over 20% today, nearing an all-time high.
At the same time, credit card balances are rising as households struggle to keep up with the rising cost of living, leaving more cardholders going into debt and falling behind on payments each month.
A recent report from the Federal Reserve Bank of Philadelphia showed that credit card delinquencies hit an all-time high, based on data stretching back to 2012. Revolving debt balances also hit an all-time high, even as banks report tightening credit standards and a decline in new card issuance.
For people with revolving mortgage interest rates above 20%, their annual interest rates will start to fall when the Fed cuts rates, but they will still only be cut from extremely high levels, providing little relief, according to Greg McBride, chief financial analyst at Bankrate.com.
“Interest rates aren’t going to come down fast enough to get us out of a bad situation,” McBride said.
Matt Schultz, chief credit analyst at LendingTree, advised that the best thing for people with credit card debt is to resolve the problem themselves.
“You can do that by getting a 0% balance transfer credit card, a low-interest personal loan, or calling your card issuer and asking them to lower the interest rate on your card,” he said. “This works more often than you might think.”
Mortgage interest rates
Interest rates on 15- and 30-year mortgages are fixed and are tied primarily to Treasury yields and the economy, but also partly to Fed policy. Mortgage rates have already started to fall, driven in large part by the prospect of a Fed-induced economic slowdown.
According to Bankrate, the average interest rate on a 30-year fixed-rate mortgage is currently below 7%.
“If the good news, like inflation, continues, [mortgage rates] “Interest rates may continue to trend lower,” said Jacob Channell, senior economist at LendingTree. “While we don’t expect a significant decline in the near term, rates could return to 2024 lows in the coming weeks and months.”
“If all goes well, the average interest rate on a 30-year fixed mortgage could end up being closer to 6 percent, rather than 6.5 percent or 7 percent.”
On the surface, that may not seem like much, but a drop of nearly 50 basis points “is nothing to sniff at in the mortgage industry,” Channell added. One basis point is 1/100th of a percentage point.
Car Loans
Auto loan amounts are fixed, but payments are increasing as higher interest rates on new loans, combined with rising car prices, make monthly payments less affordable.
According to Bankrate, the average interest rate on a five-year new car loan is currently just under 8%.
But “financing is one variable, and frankly it’s one small variable,” McBride said. For example, a 0.25 percent reduction in interest rates on a $35,000, five-year mortgage could translate into $4 a month, he said.
McBride said consumers would benefit more from improved credit scores, which could then lead to better loan terms.
Student Loans
Federal student loan interest rates are also fixed, so most borrowers will not be immediately affected by the Fed’s move. But undergraduates who took out Federal Direct Student Loans in 2023-24 will see their interest rates rise to 5.50%, up from 4.99% in 2022-23, and Federal Direct Undergraduate Loan interest rates for 2024-2025 will be 6.53%, the highest rate in at least the past decade.
Private student loans tend to have variable interest rates tied to the prime rate, Treasury bills, or other interest rate indexes, meaning borrowers are already paying higher interest rates—though how much higher depends on the benchmark.
Savings rate
While central banks cannot directly influence deposit rates, yields tend to correlate with changes in the target federal funds rate.
As a result, interest rates on the highest-yielding online savings accounts have fluctuated widely and are now up to 5.5%, well above the rate of inflation, a rare win for those building up a cash cushion, says Bankrate’s McBride.
But those rates would fall if the central bank cuts its base rate, he added. “If you’re considering a term deposit, now’s the time to lock it in,” McBride said. “These yields aren’t going to improve, so there’s no point in waiting.”
Currently, the highest-yielding one-year CDs offer yields of over 5.3%, on par with high-yield savings accounts.