On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of 0.05% to the federal funds rate. That’s the largest single rate cut we’ve seen since the 2008 financial crisis.
It’s the Fed’s job to maintain stability in the economy by raising or lowering the cost of money. Their latest move was an aggressive effort to prepare for any potential problems that could arise in markets due to the spread of the coronavirus.
The Federal Reserve just made the largest single rate cut we’ve seen since the 2008 financial crisis.
Any rate change the Fed makes trickles down and affects many aspects of our personal finances. Let’s review six ways the most recent rate slash could help or hurt you. You’ll learn some smart moves to make now so the lower interest rate can work in your favor.
Financial accounts affected by an interest rate cut
Here are common ways that the interest rate cut will trickle through the economy and affect your finances.
1. Credit cards
Since most of us have at least one credit card, it’s an account that you’re likely to see changed by the interest rate cut. As I covered in What Is Credit Card APR?, many credit cards come with a variable rate that’s tied to a financial index such as the prime rate.
When the Fed’s benchmark rate (which is the federal funds rate) changes, the prime rate moves in lockstep. That means your card’s variable APR can also go down. However, it depends on the type of card you have and your issuer.
For the majority of cardholders with variable APRs, you probably will see your rate drop by half a percent within the next month or two.
Some rewards cards with high APRs may not fall substantially or at all if they offer generous points or rewards programs that are costly to the issuer. If your agreement with the issuer doesn’t say that the card rate will go down when something like a prime rate decrease occurs, it probably won’t.
But for the majority of cardholders with variable APRs, you probably will see your rate drop by half a percent within the next month or two. For example, if your card’s APR is 20%, your adjusted rate could go down to 19.5%.
While a 0.05% drop may not seem like a tremendous amount, every little bit…