How the Fed rate cut will affect your finances

The Federal Reserve cut borrowing costs for the second time in a row on Wednesday.

Lowering the federal funds rate by a quarter point puts that benchmark in a range between 3.75%-4.00%. The decision comes amid intense pressure from President Donald Trump, who has repeatedly called on Fed Chair Jerome Powell to drastically lower rates, arguing that would make it easier for businesses and consumers to borrow and boost the economy.

The federal funds rate, which is set by the Federal Open Market Committee, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves have a ripple effect on many types of consumer products.

For Americans who are stretched thin, this latest move could bring some relief from high borrowing costs, according to Mark Zandi, chief economist at Moody’s. “Their standard of living has flatlined, and a lot of people are uncomfortable with that,” Zandi said. “Many are borrowing money to supplement their income, and now they are paying interest on that debt.”

Many shorter-term consumer rates are closely pegged to the prime rate, which is the rate that banks set and extend to their most creditworthy customers — typically 3 percentage points higher than the federal funds rate. Longer-term rates are also influenced by inflation and other economic factors.

From credit cards and car loans to mortgage rates, student debt and savings accounts, here’s a look at how the central bank’s policy could impact the rates you see.

Credit cards are one of the main sources of unsecured borrowing, and 60% of credit card users carry debt from month to month, according to a March report by the Federal Reserve Bank of New York.

But credit card rates are currently near an all-time high, averaging more than 20%, according to Bankrate.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. When the Fed lowers rates, the prime rate also comes down and the interest rate on your credit card debt could adjust within a billing cycle or two. Yet even then, credit card APRs will still be at extremely high levels.

When the Fed cut rates in the second half of 2024, lowering its benchmark by a full point by December, the average credit card rate fell by only 0.23% over the same period, an analysis by CardRatings found.

“A quarter-point rate cut is good, but it doesn’t really change a lot for people carrying a balance on their credit card,” said Stephen Kates, a financial analyst at Bankrate.

When it comes to savings on interest charges, “we are talking about dollars per month,” Kates said. “That’s not nothing, but it’s also not a lot.”

For example, if you have $7,000 in credit card debt on a card with a 24.19% interest rate and pay $250 per month on that balance, lowering the APR by a quarter-point would save about $61 over the lifetime of the loan, according to calculations by Matt Schulz, LendingTree’s chief credit analyst.

Although mortgages make up the lion’s share of consumer debt, those longer-term loans are less impacted by the Fed. Both 15- and 30-year mortgage rates are fixed for the life of the loan, so most homeowners won’t be immediately affected by a rate cut.

Mortgages are also more closely tied to Treasury yields and the economy. Still, homebuyers could benefit if the expectation of future cuts puts downward pressure on mortgage rates.

“This presents a tangible opportunity for consumers,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.

For example, with another 25-basis-point reduction, a new home buyer securing a $350,000 mortgage at a 6.75% interest rate could potentially see their monthly payments fall by nearly $150, according to Raneri. “Over time, such savings can significantly ease household budget pressures,” she said.

Other home loans are more closely tied to the Fed’s moves. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.

Beyond mortgages and credit card debt, auto loans also account for a significant share of household expenses. But the interest rate is only one factor: High prices and Trump’s tariffs have worsened the affordability equation for car shoppers.

Since auto loan rates, like most mortgages, are fixed for the life of the loan, experts say potential car buyers could mostly benefit if borrowing costs come down in the future.

“While another 25-basis-point rate cut may not drastically lower monthly payments in today’s high-rate, high-price environment, it could help lift consumer confidence,” said Joseph Yoon, Edmunds’ consumer insights analyst.

“More importantly, it may signal that lenders and automakers are preparing to introduce additional financing incentives as we head into the holiday season,” he said. “For many shoppers who’ve been waiting for the right deal, this could be the moment when more attractive offers finally start to appear.”

Federal student loan rates are also fixed. The rate for new loans only resets once a year on July 1, so most borrowers won’t be immediately affected by a rate cut.

Eventually, as rates fall, borrowers with fixed-rate private student loans may be able to refinance into a less expensive loan, according to higher education expert Mark Kantrowitz.

However, refinancing a federal loan into a private student loan will forgo some of the “superior benefits” of federal student loans, he said, such as better deferments and forbearances, as well as the income-driven repayment plans, loan forgiveness and discharge options that exist for now. Trump’s “big beautiful bill” will phase out some of those repayment plans in 2028. 

Also, some private loans have a variable rate tied to the Treasury bill or other benchmarks, which means borrowers with variable-rate private student loans may automatically get a lower interest rate in line with the Fed’s move, Kantrowitz said. 

For savers, it’s more important to take matters into your own hands now that the Fed is on a rate-cutting path. While the central bank has no direct influence on deposit rates, the yields tend to be correlated with changes in the target federal funds rate.

“Yields on high-interest savings accounts and CDs are only going to keep dropping,” said LendingTree’s Schulz. “It is likely time to act to lock in today’s high rates.”

For now, top-yielding online savings accounts and one-year certificate of deposit rates pay more than 4%, according to Bankrate, still above the rate of inflation.

Subscribe to CNBC on YouTube.