What the Fed rate cut means for loans, mortgages and credit cards

After more than a year of keeping the federal funds rate steady, the Federal Reserve has begun lowering interest rates.

After its September gathering, the Federal Open Market Committee (FOMC) made a much-anticipated cut of 50 basis points, lowering the target range to between 4.75% and 5.0%. It dropped rates another 25 basis points in November, taking the fed fund rate down to between 4.50% to 4.75%.

The committee has one more meeting in 2024, on Dec.17 and 18. On Nov. 13, 2024, the CME Group put the likelihood that we'd see another 25-basis-point decline at about 82%, with 18% odds of there being no movement.

The FOMC doesn't choose the interest banks charge for credit cards, mortgages and other financial products. Instead, it dictates the rate at which they can charge each other for overnight loans of excess reserves, which is one of the most powerful tools the Fed has in guiding the U.S. economy.

With more interest rate cuts expected on the horizon, here are some financial moves to consider in the new economic landscape.

Changes to the fed funds rate won't mean large, immediate drops in the annual percentage rate (APR) credit card companies charge cardholders.

The Fed's last rate hike cycle, which stretched from March 2022 to July 2023, saw average APRs jump from 16.34% to over 20%. Consumers paying interest on their cards are now dealing with an average APR of 21.76%, according to the latest Federal Reserve data from August 2024.  

If you're among this group, a 0% intro APR balance transfer card could give you time to pay off your balance without additional interest.  

Just make sure to prioritize paying off the card so you're not stuck with an even higher interest rate once the zero-interest period ends.

Interest on some private student loans should start declining, as well. So the time could be right for refinancing them.

"We had a whole generation of borrowers who enjoyed competitive rates," said Joe Bogardus, a financial services executive with Barnum Financial Group. . "But if you took out private student loans in the last year or two, you might be stuck with a very high rate." 

If you have a variable-rate loan, your rate may drop automatically. But refinancing and converting to a fixed-rate loan can ensure you lock in that lower number if rates go up again. And if you already have a fixed-rate private student loan, refinancing can allow you to grab a lower rate.

Private lenders look at credit scores and income to determine your rate when you refinance, so those with good credit will reap the most benefits from making this money move.

Citizens doesn't charge application, origination or disbursement fees and it offers a 0.50% rate discount on refinanced loans if you automate payments.

If you have federal student loans, though, Bogardus advises serious caution: Refinancing through a private lender means you'll lose government protections like forbearance, deferment and income-driven repayment plans.

And if widespread student loan forgiveness ever becomes a reality, you likely won't be able to participate.

The average auto loan interest rate in the second quarter of 2024 was 6.84% for a new car, according to Experian's State of the Automotive Finance Market report, and 12.01% for a used car. That's up from 6.73% and 11.91% respectively in the first quarter, but down from the 15-year highs they hit in 2023.

As with most sectors, auto loan rates won't plummet now that the Fed has started cutting. But the timing might still be right to get that new ride.

"We're starting to see prices come down, now that the supply has increased and manufacturing has picked up," Bogardus said. "Look for deals — historically, September to November is when new models come out, so dealerships are looking to unload leftover inventory."

You might find better financing with dealerships, he added "because some manufacturers have an oversupply of certain models and have better discounts."

If you bought a house in the past few years and are saddled with a high mortgage rate, this rate-cutting cycle could be the right time to refinance, according to Bogardus.

"If you plan on staying in your home for a while, you might think about refinancing once mortgage rates drop another half-percent or percent," he said. Refinancing comes with costs, Bogardus advised, so make sure the savings you get from lowering your rate is more than what you'll pay in lender fees and closing costs. 

If you want to convert your home equity into cash, Rocket Mortgage is our pick for cash-out refinancing.

While most lenders cap cash-out refinances at 80% to 90% of your home equity, Rocket approves qualified borrowers at 100% equity. And its average closing time for refinance mortgages is just 21 days, nearly half the national average. 

While borrowers largely benefit from the Fed cutting rates, savers will take a hit. High-yield savings accounts have been a go-to savings vehicle in recent years, with some offering returns well over 5%.

Those yields will dwindle, Bogardus said, but not all at once. 

"If your goals are shorter-term — or you're using the account for something like an emergency fund — you'll most likely want to still keep that HYSA," he said. 

Rates for CDs will also drop in the next 10 to 12 months, he added, so now could be the right time to lock one in.

Bonds have an inverse relationship to interest rates, Bogardus said, so a rate-easing cycle is a good time to invest in them.

"It's possible to purchase bonds directly, but that requires understanding the individual credit risk involved," he added. "If you're not comfortable with that, it makes sense to be diversified in a bond fund."    

Brokerage firms like Charles Schwab and Fidelity specialize in bond investing and have a variety of taxable and tax-free bond funds available.   

"Each individual has their own risk tolerance and goals," Bogardus added. "You should speak with a licensed financial professional when trying to determine the proper investment strategy, especially if you're new to investing."

At CNBC Select, we work with experts with specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Joseph Bogardus, a financial services executive with Barnum Financial Group. Based in Connecticut, he is a designated Special Care Planner and college funding consultant, as well as a certified financial planner and an accredited investment fiduciary.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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