Personal Finance

The Fed holds rates steady. Here's why that matters to you

Key Points
  • The Federal Reserve’s decision to leave rates unchanged offers ordinary Americans an opportunity to improve their financial picture as a new year begins.
  • With interest rates holding steady for now, it's a good opportunity to pay down debt and boost savings, experts say.
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The Federal Reserve's decision Wednesday to keep interest rates steady came as a relief to many. For good reason.

Although the federal funds rate, which is what banks charge one another for short-term borrowing, is not the rate that consumers pay, the Fed's moves still affect the borrowing and saving rates they see every day.

"If the Fed is on hold, we are at least on hold with lower interest rates," said Greg McBride, chief financial analyst at Bankrate.com. The Fed's benchmark rate is in a target range of 1.5%-1.75%.

On one hand, lower rates have meant cheaper loans, which can impact your mortgage, home equity loan, credit card balance, student loan tab and car payments.

On the downside, savers are earning less interest on their savings accounts and, in some cases, losing buying power over time.

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As a new year begins, "it's a good time to do an overall financial review — see what interest rates you are paying and what interest rates you are earning on deposits," said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace.

"There is always an opportunity for improvement."

Here's a breakdown of how the Fed’s decision can help you fulfill all of your 2020 goals, from spending less and saving more to paying down debt.

Pay off debt

• Credit cards: For starters, most credit cards have a variable rate, which means there's a direct connection to the Fed's benchmark rate.

When the Fed raises or lowers short-term rates, the prime rate moves in lock step and credit card rates follow suit.

On the heels of the previous rate moves, credit card rates now stand at 17.35%, on average, down from a high of 17.85% when the Fed started cutting rates last July, according to Bankrate.

Still, revolving balances are creeping higher.

U.S. households with revolving credit card debt owe nearly $7,000, on average, costing them roughly $1,100 a year in interest payments, according to NerdWallet's 2019 household debt study.

Those burdened with high-interest debt can reach out to their issuer directly to request a break on interest rates.

However, experts often recommend moving that balance from a high-rate credit card to one with a no-interest or low-interest balance transfer offer to reduce the amount of interest you're paying even more.

Most offers allow you to pay 0% interest for a year or more.

Alternatively, consider consolidating that debt in a personal loan with a lower interest rate. The average rate on a personal loan is 11.30%, according to Bankrate.

"You are in a position to substantially reduce the interest rate by consolidating or doing a balance transfer," McBride said. "That can turbocharge your debt repayment efforts."

Cut spending

• Mortgages: The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes.

As a result, mortgage rates are already substantially lower since the end of last year. The average 30-year fixed rate is now about 3.77%, down from 4.9% one year ago, according to Bankrate.

That means that if you bought a house last year, you may want to considering refinancing at a lower rate, McBride said, which would save the average homeowner about $150 a month.

"The bottom line is a good refinancing opportunity has gotten even better and the Fed is not looking to upset that apple cart," he said.

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How to navigate mortgage rate options

The Fed's decision to leave rates unchanged means many homeowners with adjustable-rate mortgages, which are pegged to a variety of indexes such as Libor or the 11th District Cost of Funds, or home equity lines of credit, which are pegged to the prime rate, will see their interest rate and monthly payments remain the same for the time being.

However, when the federal funds rate does move, consumers with HELOCs will feel the effects in their monthly payments within a billing cycle or two, according to Holden Lewis, NerdWallet's home expert.

While some ARMs reset annually, a HELOC could adjust within 60 days.

• Auto loans: In addition, auto-loan rates are still relatively low, even after years of rate hikes.

Currently, the average five-year new car loan rate is 4.56%, up from 4.34% when the Fed started boosting rates, while the average four-year used car loan rate is 5.33%, up from 5.26% over the same time period, according to Bankrate.

Since new cars are often financed by car manufacturers, these low rates will lower their costs, as well, and could mean car shoppers will be able to negotiate more successfully, according LendingTree's Kapfidze.

"Since the dealers are paying less for financing, they can afford to be a little more generous with the price," he said.

Student loans: If you have a mix of federal and private student loans, consider prioritizing paying off your private loans first or refinance your private loans to lock in a lower fixed rate if possible.

While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.

Private loans may be fixed or may have a variable rate tied to Libor, prime or T-bill rates, which means that when the Fed cuts rates, borrowers will likely pay less in interest, although how much less will vary by the benchmark and the terms of the loan.

Boost savings

Deposit rates: As a result of preceding changes in interest rates, savings rates — the annual percentage yield banks pay consumers on their money — are now as high as 2%, up from 0.1%, on average, before the Federal Reserve started increasing its benchmark rate in 2015.

Still, according to the FDIC, the average savings account rate is a mere 0.09% or even less at some of the largest retail banks. Online banks pay 10 times or 20 times that. To make the most of your money, snag significantly higher savings rates by shopping around.

"If you are letting your money sit in a savings account at 0%, you have been losing buying power for years," McBride said.

Online banks are able to offer higher-yielding accounts because they have fewer overhead expenses than traditional brick-and-mortar banks.

Consumers should aim to secure a deposit rate that at least beats inflation, according to Richard Barrington, a financial expert with MoneyRates.com. "It's not a question of leaving a few bucks on the table. It's a question of whether you want to lose ground," he said.

Alternatively, consumers can lock in a higher rate with a one-, three- or five-year certificate of deposit (top-yielding rates average 2.15%, 2.15% and 2.25%, respectively) although that money isn't as accessible as it is in a savings account and, for that reason, does not work well as an emergency fund.

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