The Federal Reserve’s decision Wednesday to lower its key interest rate by half a percentage point brought some clarity to the country’s top financial decision-makers, sending stocks surging to all-time highs and finally quieting the “will they, won’t they” debates among economists. But many people are still wondering, what does a rate cut mean for my money?
“The U.S. economy is in a good place,” Fed Chair Jerome Powell said at a news conference following the announcement. “And our decision today is designed to keep it there.”
Indeed, inflation has cooled significantly since the highs of the pandemic era, but questions remain about who’s actually feeling the slack. On top of stubborn food and energy costs, credit card debt is at a record $1.14 trillion, with the average balance per consumer standing at $6,329, up 4.8% year over year. Last quarter, the U.S. homeownership rate for those under the age of 35 decreased to 37.4%, the lowest level in four years.
A home for sale in Huntington Beach, Calif., in March. Allen J. Schaben / Los Angeles Times via Getty Images file
For those who’ve been waiting it out, the rate cut “will instill some hope in folks,” said Elizabeth Renter, senior economist at NerdWallet. “Now there’s this sort of beginning to the end people are going to have in mind that, ‘OK, this is close enough that I can see it coming now,’ and I think that’s going to provide some relief.”From tackling credit card debt to tiptoeing back into the housing or auto markets, here’s what experts say you should do with your money as interest rates ease.
The best way to get in position to take advantage of the rate cut — as well as those expected down the line — is to make sure your credit is in a good place, said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.
“Try to pay down some of your credit so that your utilization is lower,” she said. “That’s usually a fairly fast way to increase your credit score.”
The three major credit bureaus are legally obligated to provide U.S. consumers with a free credit report every 12 months, according to the Federal Trade Commission, which will help you scan for inaccuracies that could hike your score upon fixing. Some consumers have also found success with credit-building apps like Experian Boost.
It may sound counterintuitive to pay off your debt in order to access cheaper debt, but people with good credit standing also have the best chance of reaping those benefits.
“It’s going to more quickly translate into savings for consumers, and it also maybe gives people a catalyst to get off of the starting block,” said Rodney Lake, director of the GW Investment Institute at the George Washington University School of Business.
This week’s rate cut was good news for those struggling to unload themselves of credit card debt. It’s not because cardholders will suddenly see a huge decrease in the average annual percentage rate, or APR, which stands at more than 22% for existing accounts — and which experts say this first interest cut from the Fed won’t dent much. The advantage, now, is that consumers’ options to tackle that debt will become cheaper.
For example, if your credit standing nabs you an offer for a 12%-rate consolidation loan from a bank or credit union, you could use that to pay off a 20%-rate card for “massive savings,” Lake said. Consumers should also consider balance transfer cards, especially those with 0%-APR introductory periods.
Now’s also a good time to simply pick up the phone, Lake said, as not all lenders will quickly or automatically lower interest on accounts with a variable APR. Be sure to ask what else you might be eligible for: A recent LendingTree report found that 76% of consumers who asked for a lower interest rate on one of their credit cards in the past succeeded — by an average reduction of 6.5 percentage points.
Many people hoping to buy homes have been sitting on the sidelines, waiting for better mortgage rates. If you’re one of them, don’t try to sync your house shopping with the further rate cuts, experts say. Now is the time.
Mortgage rates have dipped to 6.09%, according to Freddie Mac. If you have your down payment ready and have found the perfect home within your budget, waiting further “could mean missing out on an opportunity,” Renter said.
“Not to mention the fact that if you’re waiting for rates to reach a certain level, so is everyone else,” she added. “As rates come down, competition is going to pick up,” she said, noting the ongoing issue of limited housing inventory — which itself could mean a revival of bidding wars for the homes that are available.
Refinancing your mortgage, however, is a different story. Homeowners might be eager to lock in a lower rate — or even take out a home equity loan to “pay off other debt that they’ve been accumulating” at a cheaper cost, Raneri said, as interest rates decline for mortgage products.
That’s not a bad idea, but take a beat and do the math before refinancing, said Lee Baker, founder of the planning firm Apex Financial Services.
“This rate cut probably ain’t going to be it, right? So all things considered equal, you might want to wait for a few more cuts and let that work its way into the system,” he said.
The number of people with a certificate of deposit — fixed-rate bank accounts with term limits — rose to the highest level in a decade last year, according to S&P Global. They’re a popular savings instrument when interest rates are high, and as most economists expected, CD rates have already started declining since the Fed’s interest rate cut.
However, there’s still time to lock in an annual percentage yield of at least 5.25%, Bankrate found.
“If you wait until 2025, I really don’t think we’re going to see 12-month CDs at 5%,” said Baker, so consumers who can stand to put away a chunk of cash for a while — and avoid the early withdrawal penalty — should go for it.
Locking in a favorable CD rate is also a good alternative for those shopping for high-yield savings accounts, whose rates fluctuate based on the market and will also start declining soon.
Lastly, if Thursday’s stock rally was any indication, now is a good time to review your stock market participation, financial experts say.
“If the market is starting to stabilize around inflation and we’re near or at full employment, it’s also a good time to be an owner of companies” through the stock market, Lake said. Increasing your stock exposure could mean maxing out your contribution to your employer’s 401(k) — especially if there’s an employee match — as well as your IRA or Roth IRA inputs, he said.
What it doesn’t look like, Baker says, is making big shifts outside of your risk threshold in order to game the market’s reaction to the Fed’s moves.
“This rate cut is not something that should trigger you to go make any drastic changes to the overall direction of your portfolio,” he added. “Don’t get caught up in any short term noise as a result of this.”
