Personal Finance

Fed holds rates near zero — here's what that means for you

Key Points
  • For everyday Americans with good credit, historically low interest rates can be a lifesaver.
  • Riskier borrowers will have to look elsewhere for relief.
Fed to fund small business loans from banks
Fed to fund small business loans from banks

The Federal Reserve said Wednesday it would keep its benchmark interest rate near zero in response to the economic shock from the coronavirus crisis.

"The most significant responsibility of the Fed now is to make sure that credit markets continue to function," said Greg McBride, chief financial analyst at "Without functioning credit markets, there will be no economic recovery."

To that end, the central bank has expanded the number of cities and counties eligible for municipal lending, to keep money flowing to local and state governments.

With more than 26 million people out of work and a growing number of Americans feeling severely cash-strapped, historically low borrowing rates means that loans are cheaper — if you can get them.

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.

For example, credit card rates are down to a three-year low of 16.46% from a high of 17.85% when the Fed started cutting rates last July, according to Bankrate.

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"The Fed's recent rate cuts have sent interest rate on new credit card offers down to the lowest levels seen in years," said Matt Schulz, the chief industry analyst at CompareCards.

"The problem, however, is that banks are making credit cards much harder to get now as they try to get their footing in the wake of the outbreak," he said.

As conditions worsen, credit card issuers have also begun closing accounts and lowering credit limits, particularly on those accounts that are at a greater risk of becoming delinquent.

What a 0% interest rate means for your budget
What a 0% interest rate means for your budget

At the same time, mortgage rates are substantially lower, to the benefit of some but not all. 

The average 30-year fixed rate is now about 3.55%, the lowest since September 2016, according to Bankrate.

"Credit-worthy borrowers that have sufficient equity continue to be able to refinance," McBride said. Among this group, "refinancing activity is off the charts."

However, some lenders have stopped offering certain refinancing options and jumbo mortgage programs, due to the new risk in the market from the mortgage bailout program, part of the CARES Act. 

"The intensity of the crisis means that loan availability is declining and thus the boost to the economy is muted," said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace.

For homeowners or buyers with lower credit scores, "credit is tightened," McBride added.

There is help if you need it

For those riskier borrowers who have suffered an income disruption and need to access cash, now is the time to tap that rainy day fund, if you have one, McBride said, "If you have emergency savings, this is why you have it."

The U.S. Department of Education is also giving most federal student loan borrowers a break from their monthly bills until at least October

Otherwise, ask your lender for payment relief.

Many consumer banks are offering temporary hardship assistance for those impacted by Covid-19, such as allowing customers to defer a card payment. Even utility companies and private student loan servicers are amenable to temporary hardship accommodations, often on a case-by-case basis.

"Getting payment relief on those big-ticket items is really critical to being able to focus on necessities like food and medicine," McBride said.  

In fact, more than 90% of Americans who asked for a break on mortgage and credit card bills due to Covid-19 received one, according to a recent survey from LendingTree.

Still, many borrowers said they didn't realize they had that option, the survey also found.

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