What does this mean for you?

Now, as the central bank prepares the ground for a rate cut for the first time in years when it meets again in September, consumers may see their borrowing costs begin to fall as well — and some already have.

The federal funds rate, set by the US central bank, is the rate at which banks borrow and lend to each other overnight. While that’s not the rate consumers pay, the Fed’s moves still affect the lending and savings rates they see every day.

“The first cut won’t make a material difference to people’s pocketbooks, but it will be the start of a series of rate cuts later this year and into next year,” House said.

That could bring the Fed’s benchmark rate from the current range of 5.25% to 5.50% to below 4% by the end of next year, according to some experts.

From credit card and mortgage rates to car loans and student debt, here’s where those monthly interest expenses stand as we approach that initial rate cut.

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card interest rate has risen from 16.34% in March 2022 to more than 20% today — approaching an all-time high.

At the same time, as households struggle to keep up with the high cost of living, credit card balances are also higher and more cardholders are carrying month-to-month debt or falling behind on payments.

A recent report from the Federal Reserve Bank of Philadelphia showed record credit card delinquencies, based on data dating back to 2012. Revolving debt also hit a new high, even as banks reported tightening credit standards and a decline in new card originations .

For those paying 20% ​​interest — or more — on a revolving balance, annual percentage rates will begin to decline when the Fed lowers rates. But even then they will only ease at extremely high levels, offering little relief, according to Greg McBride, chief financial analyst at Bankrate.com.

“Rates aren’t going to fall fast enough to get you out of a bad situation,” McBride said.

The best move for those with credit card debt is to take matters into their own hands, advises Matt Schulz, chief credit analyst at LendingTree.

“They can do that by getting a 0% balance transfer credit card or a low-interest personal loan, or by calling their card issuer and asking for a lower interest rate on a card,” he said. “This works more often than you think.”

While 15- and 30-year mortgage rates are fixed and tied primarily to Treasury yields and the economy, they are partly influenced by Fed policy. Mortgage rates have already started to fall, largely due to the prospect of an economic slowdown due to the Fed.

The average interest rate on a 30-year fixed-rate mortgage is now under 7%, according to Bankrate.

“If we continue to get good news on things like inflation, [mortgage rates] could continue to trend down,” said Jacob Channel, senior economist at LendingTree. “We shouldn’t expect a huge drop in the immediate future, but we may see rates return to their 2024 lows in the coming weeks and months,” he said. .

“If all goes very well, we could even end the year with the average rate for a 30-year, fixed mortgage closer to 6% than 6.5% or 7%.

On the face of it, that might not seem significant, Channel added, but “in mortgage land,” a drop of nearly 50 basis points “is nothing to scoff at.” A base unit is one hundredth of a percentage unit.

Car loans are fixed. However, payments become larger because interest rates on new loans are higher, along with rising car prices resulting in less affordable monthly payments.

The average interest rate on a five-year new car loan is now just 8%, according to Bankrate.

However, “funding is one variable, and frankly it’s one of the smaller variables,” McBride said. For example, a quarter of a percentage point reduction in interest rates on a five-year loan of $35,000 works out to $4 a month, he said.

Consumers would benefit more from improving their credit scores, which could pave the way for even better loan terms, McBride said.

Federal student loan interest rates are also fixed, so most borrowers are not immediately affected by the Fed’s moves. But undergraduates who took out direct federal student loans for the 2023-24 academic year are paying 5.50%, down from 4.99% in 2022-23 — and the interest rate on federal direct undergraduate loans for the 2024-25 academic year is 6 .53% , the highest rate in at least a decade.

Private student loans tend to have a variable interest rate tied to the prime rate, Treasury bill, or other interest rate index, meaning these borrowers are already paying more in interest. How much more, however, varies by benchmark.

While the central bank has no direct influence on deposit rates, returns tend to correlate with changes in the target federal funds rate.

As a result, rates on top-yielding online savings accounts have made significant moves and now pay as much as 5.5% — well above the rate of inflation, a rare gain for anyone building a cash cushion, according to Bankrate’s McBride .

But those rates will come down once the central bank lowers its benchmark, he added. “If you’re thinking about a certificate of deposit, now is the time to lock it in,” McBride said. “These yields won’t improve, so there’s no advantage to waiting.”

Currently, a one-year top-yield CD pays more than 5.3%, as good as a high-yield savings account.