The Federal Reserve announced last Wednesday that it would cut interest rates by a quarter percentage point for the first time in a decade.
Before we detail what this means, let’s backtrack: what exactly does the Federal Reserve do? The Federal Reserve, AKA the Fed, was founded by the U.S. Congress to maintain economic and financial stability. The Fed sets the interest rates that banks charge each other for loans by increasing or decreasing the amount of cash that is available in the banking system.
With the latest announcement, the new short-term range will be between 2% and 2.25%. This is the first time since the 2008 financial crisis, that the Fed cut interest rates. So, how does this affect your debt?
Generally, the rate cut is good news for consumers, as it makes borrowing money from banks, whether it be a credit card or a home loan, cheaper. It also comes with some positive news for people with credit card debt. For example, if you have credit card debt, the lowering of rates can make paying off debt slightly cheaper. A quarter-point cut on a $5,000 credit card balance would lower the minimum payment by $1 a month.
For credit card holders, thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009, there are limits on banks’ ability to raise interest rates on existing accounts. This means card issuers “can’t reprice you once they sell you a card – so they have to price [more risks] in,” broker John Hecht of Jefferies told Los Angeles Times.
As for student loans, federal student loans have a fixed interest rate set by Congress and are not affected by the Fed’s move. For private student loans, some come with variable interest rates that follow the prime rate. For example, your monthly payment will likely decrease for those on a regular payback schedule. However, if you’re on an income-repayment plan, your monthly payment won’t change, but a lower portion will go toward interest rather than principal.