The Federal Reserve is widely expected to lower its benchmark rates when it meets this week despite the latest inflation data it has acquired more than expected.
According to the CME FedWatch tool, the market is priced 96% of the time this month with a 25 basis rate cut.
“The Fed is now embarking on interest rate cuts and is concerned about the downside of rapid growth in the economy, particularly the job market, particularly the job market,” Bankrate senior economic analyst Mark Hamrick said in an email.
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For Americans struggling to keep up with Sky High’s interest rate fees, interest rate cuts in September could provide a welcome relief.
The federal fund rate set by the US Central Bank is the interest rate that banks borrow and lend overnight. It’s not the rate consumers pay, but the Fed’s movement still affects the rates seen daily.
From credit cards to car payments to interest on savings accounts, there is a breakdown of what the Fed expects when it starts trimming its benchmarks, and a breakdown of what you can do now to be in a better position.
1. Repay high profit obligations
“Rate cuts are welcome news for debt-ridden Americans, but when the bill ends, one small cut doesn’t make a big difference,” said Matt Schultz, chief credit analyst at Lendingtree.
If interest rates are reduced, the prime rate may also fall, and interest rates on variable-rate debt (particularly credit cards) could continue. But even so, APR only eases very high levels.
“It’s worth pointing out that borrowers should get some relief in the coming months, but interest rates are still rising,” said Ted Rothman, senior industry analyst at Bankrates. “Credit cards in particular have an average rate of 20.13%.”
This means that if the central bank cuts its fees into a quarter, it won’t have a major impact on credit card rates. “Existing borrowers could see their fees drop by about half a point,” Rothman said.
Instead of waiting for a small adjustment in the coming months, borrowers can either switch to zero transfer credit cards or consolidate high-profit credit cards with personal loans to repay them, experts say.
“We’re committed to providing a range of financial analysts with our customers,” said Stephen Cates, Bankrate’s certified financial planner and financial analyst.
While car loan fees are fixed for the life of the loan, balloon payments are another point of distress for consumers. Experts say many car shoppers can benefit from paying back their revolving debts and improving their credit scores.
2. Make your savings work
With online savings account fees, money market accounts and certificates of deposits also poised to down with Fed rate reductions, experts say this is the time to ensure the best returns available.
“A lot of high-yield savings accounts and CDs currently offer rates above 4%, more than 10 times the national average,” said Swati Bhatia, head of retail banking at Santander Bank.
When the Fed lowers interest rates, savers can benefit from these competitive interest rates, particularly using CDs.
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According to a recent study from Santander Bank, a typical saver with around $8,000 in a checking account can add $320 a year by moving that money to a CD or high-yield account that earns more than 4% interest.
Still, many Americans maintain their savings on traditional accounts, Santander found that FDIC data currently pays an average of 0.39%.
3. Consider making big moves
“The housing market will be the biggest beneficiary of low-costs as it unlocks frozen sales by homeowners who are reluctant to abandon low-cost mortgages that have been stolen over a decade following the Great Recession.”
The mortgage rate is fixed and linked to Treasury yields and the economy, but has already fallen sharply since its peak at over 7% in January.
According to Mortgage News Daily, the average rate for a fixed-rate mortgage over the 30-year period was just under 6.3% as of Friday.
“Over the past few weeks, consumer sentiment around mortgages has become a little healthier. We are beginning to see some great momentum,” said John Hummel, head of retail home lending at the US Bank.
Hummel added that as more potential home buyers enter the market, more inventory will be released. And, “If we see some additional rate cuts, that would sign just as we’ll enter the second half of the year.”
4. Improve your credit score
Ultimately, people with better credits on almost all consumer products will qualify for the best loan terms at the lowest interest rate.
According to Tommy Lee, senior director of scores and predictive analytics at FICO, if you push your credit score up, you’ll end up paying your bills on time each month, with a low balance when needed and applying for credit when needed.
The general rule is to spin the debt of less than 30% of the available credits and “don’t go out and open 10 credit cards,” Lee said.
You may also be able to improve your credit score by checking your credit report regularly and dealing with errors, Schulz added. “Even one late payment on a credit report can knock out 50 or more points from your credit score. So if it’s listed incorrectly in the report, it needs to be corrected.”
This can be the difference between a “good” score generally above 670 and a “very good” score above 740. (The most popular scoring model, the FICO score ranges from 300 to 850.)
“It’s important for people to understand that the Fed can have a greater impact on interest rates than before,” Schultz said.
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