Interest Rates Are Likely To Fall Soon -- Here's The Most Important Thing To Know
A cut is welcome news for those with debt, but there are downsides, too
Hello, my friend!
There's no guarantee, but it appears that next week will bring something that consumers have been waiting for all year.
I, and most other experts, expect the Federal Reserve to reduce interest rates for the first time in 2025 at its next meeting, scheduled for September 16-17.
That’s both good and not-so-great news.
Here’s why…
So why does a Fed rate cut matter?
When that happens, interest rates for many credit cards, savings accounts and other financial instruments will likely fall within a few weeks to a couple of months.
That's not great news for savers because it means that the relatively high rates we're seeing today on high-yield savings accounts and CDs are likely to fall off soon.
However, rate cuts are oh-so-welcome news for borrowers. That's especially true for those with credit card debt. That's because most credit cards in the US are so-called variable-rate cards, meaning that when the Fed raises or lowers rates, most credit cards' rates will move as well — in the same amount and direction as the Fed's movement.
The even better news for cardholders is that these lower rates will apply to current card balances as well as future balances. (Note: That's not the case with installment loans such as personal loans, mortgages and auto loans. Rates offered on new loans of those types will likely fall, but the rate paid by those currently holding those loans will not.) Cardholders can expect to see their rates fall within a month or two of the Fed making its move.
The impact of Fed rate cuts isn’t as clear when it comes to mortgages, however. There is certainly hope that the Fed’s moves will spur lower mortgage rates and inspire more Americans to shop for homes or refinance their current mortgages, but there’s no guarantee. While Fed moves directly impact credit card rates, their influence on mortgage rates is indirect and less predictable. In fact, we actually saw mortgage rates rise a bit last fall despite the Fed’s rate cuts around that time.
But here's the most important thing to know...
When credit card rates fall, they probably won't fall much at first. That means it is still important for you to take action.
Sorry to burst your bubble, but it is true. No one should expect their credit card bill to change dramatically overnight. No one knows just how big the Fed rate cut will be, but even a really aggressive change likely isn't going to be a massive game-changer for most people. The real impact will come later if future small cuts start adding up to something significant.
Ugh. Really? So what should I do in the meantime?
Take matters into your own hands. The moves you make now can be way more impactful than what the Fed will do.
Here's what I mean...
Getting a 0% balance transfer card can save you way more than any Fed rate cut ever would. These cards allow you to go a year or more without accruing any interest on the balance you transfer onto the card. It is perhaps the best weapon that anyone has in the battle against credit card debt.
If you don't qualify for one of those cards -- the banks are kinda stingy with them these days -- a personal loan can help, too. It won't save you as much as a 0% card would, but it can lower your rate more than the Fed is expected to.
Calling your card issuer and asking for a lower interest rate on your credit card works 83% of the time and brings an average reduction of nearly 7 percentage points. That's WAY beyond what the Fed will do. (I walk you through how to do this in my book, "Ask Questions, Save Money, Make More: How To Take Control Of Your Financial Life.")
Just shopping around for a better rate on an auto loan, personal loan or mortgage can make a dramatic difference in your interest rate and save you a bunch of money. “Shop around” is perhaps the oldest advice in the world of personal finance, but it still works.
If you haven't moved your savings to a high-yield savings account (HYSA), you've still got time. The record highs we saw in 2024 are gone, but rates are still relatively high. Plus, even after the Fed starts cutting rates again, the difference in rates between the HYSA and the typical megabank can be significant enough to make it well worth the effort.
If you’re considering purchasing a CD, now may be a good time. Buying a one-year CD, for example, would allow you to lock in today’s rates for a bit longer. Just make sure that you won’t need to access those funds during that year. Otherwise, penalty fees can outweigh any benefits from those higher rates.
On a different note… Yes, I’m really wrapping this up with a question about the holidays — already
I know, I know, I know. We’re barely past Labor Day, but I wanted to take your temperature on whether you think economic uncertainty is going to impact your holiday plans.
And feel free to say more in the comments below. I’d love to hear what you think.
Until next time!
Matt
