The US Federal Reserve (Fed) announced on Wednesday that it would cut interest rates by another quarter of a point (25 basis points). This is the third consecutive rate cut, bringing the total to a full cut in the federal funds rate since September.
While this is good news for consumers who are struggling under the weight of high borrowing costs following 11 consecutive rate hikes between March 2022 and July 2023, lower interest rates will have a noticeable impact on household finances. It may take some time before it is given.
“Interest rates were on the up elevator in 2022 and 2023 and are now on the down stairs,” said Greg McBride, chief financial analyst at Bankrate.com.
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Overall, many people feel their financial situation is better going into the new year, but nearly nine in 10 Americans think inflation is still a problem, and 44% say the Fed is worried about inflation. According to a recent study by WalletHub, the company believes it has done a poor job of curbing the market.
“Add to this the widespread talk of tariffs, and you have a recipe for anxiety among borrowers,” said John Keenan, editor-in-chief of WalletHub.
Meanwhile, high interest rates are impacting the cost of all types of consumer borrowing, from auto loans to credit cards.
The 0.25 percentage point cut in December will lower the Fed’s overnight borrowing rate to a range of 4.25-4.50%. Although this is not the interest rate consumers pay, the Fed’s actions still affect the borrowing and savings rates that consumers see every day.
From credit card and mortgage rates to car loans and savings accounts, take a look at how the Fed’s interest rate cuts could affect household finances in the year ahead.
credit card
Most credit cards have variable interest rates, so they are directly tied to the Fed benchmark. The central bank’s rate hike cycle has pushed average interest rates on credit cards up from 16.34% in March 2022 to more than 20% now, near record highs.
Average interest rates on credit cards have only just broken out of extremely high levels since central banks started cutting interest rates.
“Another rate cut is welcome news after a tumultuous year, but ultimately it doesn’t mean much for people who are in debt,” said Matt Schultz, credit analyst at LendingTree. “A quarter-point reduction can reduce your monthly debt payment by $1 to $2. The best thing cardholders can do in 2025 is to take matters into their own hands when it comes to high interest rates. It certainly doesn’t change the fact that it’s a matter of solving the problem.” ”
For people with credit card debt, Schultz says it’s best to consolidate debt with a 0% balance transfer card or a low-interest personal loan, rather than waiting for a small APR adjustment in the coming months. He said it was a strategy.
Otherwise, ask your issuer to lower the rate on your current card. “This often works out much better than you think,” he says.
A customer shops for groceries at a Costco store on December 11, 2024 in Novato, California.
Justin Sullivan | Getty Images
car loan
Auto loan rates are also still very high, with the average used car loan rate being 13.76%, compared to 9.01% for new cars, according to Cox Automotive.
Because these loans are fixed and not adjusted by Fed rate cuts, “this is another case where it’s best to take matters into your own hands,” Schultz said. .
In fact, anyone planning to finance a car purchase could save more than $5,000 on average by shopping around for the best rate, according to a 2023 LendingTree report.
mortgage interest rate
15- and 30-year mortgage rates are fixed and tied primarily to Treasury yields and the economy, so they don’t fall in step with Fed policy.
As of the latest count, the average interest rate on a 30-year fixed-rate mortgage rose to 6.75% from 6.67% in the week ended Dec. 13, according to the Mortgage Bankers Association.
“Since the Fed began cutting rates in September, mortgage rates have not gone down, they have gone up,” Bankrate’s McBride said.
“Long-term bond yields are rising again on expectations that interest rates will be cut less in 2025, and mortgage rates are back to near 7%,” he said.
However, most people have fixed-rate mortgages, so their interest rate won’t change unless you refinance or sell your current home and buy another property.
Anyone looking to buy a home can find ways to save money.
For example, a $350,000, 30-year fixed mortgage with an average interest rate of 6.6% would be $56 cheaper each month compared to November’s high of 6.84%, according to Jacob Channell, senior economic analyst at LendingTree. That’s what it means.
“It may not seem like much at first glance, but a discount of about $62 per month equates to a savings of $672 per year, or $20,160 over the life of the mortgage,” he said. Ta.
student loan
Federal student loan interest rates are also fixed, so most borrowers won’t get much relief from rate cuts.
However, if you have private loans, those loans may have fixed interest rates or variable interest rates tied to Treasury bills or other interest rates. When the Fed lowers interest rates, interest rates on these private student loans will be lowered over a period of one to three months, depending on the criteria, said Mark Kantrowitz, a higher education expert.
Still, Kantrowitz said, “Reducing interest rates by a quarter of a percentage point would reduce loan payments by about $1 to $1.25 per month over 10 years, reducing total loan payments by about 1 percent.” Ta.
Eventually, he said, borrowers with existing variable-rate private student loans may be able to refinance into cheaper fixed-rate loans. However, refinancing federal loans with private student loans eliminates the safety nets that come with federal loans, such as deferment, forbearance, income-based repayment, and loan forgiveness and forgiveness options.
Plus, if you extend the term of your loan, you’ll end up paying more interest on your balance.
savings rate
Central banks do not directly influence deposit rates, but yields tend to correlate with changes in the target federal funds rate.
As a result of the Fed’s previous rate hikes, the highest-yielding online savings accounts have changed their interest rates significantly and are still paying as much as 5%. This is the most savers have been able to earn in nearly 20 years, and is up from about 1% in 2018. 2022, according to Bankrate.
“The prospect of a slower Fed next year is better news for savers than borrowers,” McBride said. “The most competitive yields on savings accounts and certificates of deposit remain easily above inflation.”
One-year CD interest rates currently average 1.74%, but the highest-yielding CDs are more than 4.5%, about the same as high-yield savings accounts, according to Bankrate.
