/Here is how the Fed rates cut affects you?

Here is how the Fed rates cut affects you?

On the one hand, lower rates often mean cheaper loans, which can impact your mortgage, home equity loan, credit card, student loan tab and car payment.

However, borrowers may not get the full benefit if the economy is weakening, as the Federal Open Market Committee and Chairman Jerome Powell have suggested it is.

In anticipation of an economic slowdown, lenders are less inclined to lend money and may even charge a higher interest rate to hedge against the risk, according to Richard Barrington, a financial expert with MoneyRates.com.

Consumers also likely will earn less interest on their savings accounts and, in some cases, lose buying power over time.

“In this case, a Fed rate cut would not be very good” for savers or borrowers, Barrington said.

Here’s a breakdown of how it works:

  • Credit cards

For starters, the prime rate, which is the rate banks extend to their most creditworthy customers, is typically 3 percentage points higher than the federal funds rate. That not only determines your savings rate, it also is the rate used for many types of consumer loans, particularly credit cards.

With a rate cut, the prime rate lowers, too, and credit cards likely will follow suit. Most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.

As a result, cardholders could see a reduction in their annual percentage rate within a billing cycle or two. Considering the average household owes $8,602, that will save credit card users roughly $1.6 billion in interest, according to an analysis by WalletHub.

However, credit card debt will continue to be expensive, with APRs still only down slightly from all-time highs.

A quarter-point decrease from around 17.5% saves someone making minimum payments toward the average debt about $1 a month, according to Ted Rossman, industry analyst at CreditCards.com.

“A quarter of a percent decrease isn’t going to rescue anyone,” said Sara Rathner, a credit card expert at NerdWallet.

Better yet, shop around for a zero-interest balance transfer offer and “transfer your existing high-rate credit card debt to a new card with no interest while you still can,” Rossman advised. If the economy continues to soften, these terms could get less generous, he said.

At any time, cardholders can also reach out to their issuer directly to request a break on interest rates.

  • Savings

Savers only recently started to benefit from higher deposit rates — the annual percentage yield banks pay consumers on their money — after those rates hovered near rock bottom for years. After another rate cut, those rates likely will slip back to near zero.

Because the central bank raised the federal funds rate nine times in three years, the highest-yielding accounts are now paying more than 2.25%, up from 0.1%, on average, before the Fed started increasing its benchmark rate in 2015.

“The one piece of good news is that there’s a huge disparity between top bank rates and average rates,” MoneyRates’ Barrington said. With an annual percentage yield of 2.25%, a $10,000 deposit earns $225 after one year. At 0.1%, it earns just $10.

Still, nearly 7 in 10 Americans earn less than 2%, according to a survey by Bankrate.

Such low interest rates have cost depositors $1.5 trillion in purchasing power in the decade since the Great Recession, according to Barrington.

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Online banks are typically able to offer the highest yields because they come with fewer overhead expenses than traditional bank accounts and savers can snag significantly higher savings rates by shopping around.

“If it means the difference between staying ahead of inflation and losing purchasing power, it’s worth it,” Barrington said.

Alternatively, consumers can lock in a higher rate with a one-, three- or five-year certificate of deposit (top yielding rates average 2.3%, 2.5% and 2.75%, 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.