How a Close to Zero Interest Rate Affects Your Money
The Federal Reserve announced on Sunday that it would cut interest rates to near zero and the benchmark for consumer interest rates would fall to 0-0.25%.
According to a press release from the Federal Reserve, it is likely to remain at this level until “the economy wears through the recent events.”
But that doesn’t mean you suddenly get interest-free debt leave or super-cheap mortgages. The rate set by the Federal Reserve System is a benchmark, not a universal mandate, and in practice it is more complex than it might seem at first glance.
Here’s what you can expect with your financial accounts in the next few weeks.
Checking and savings accounts
You may see a decrease in the interest rate for your checking or savings account, but you will not lose the ability to earn interest in full.
Ken Tumin, banking expert at DepositAccounts.com , said rates on online savings accounts could remain stable around 1% if the latest downturn is any indication.
“During the days with a zero interest rate 2008-2015. Most of the rates in online savings accounts remained in the range of 0.70% to 1.00%, ”he said in an email. “If history repeats itself, it could be the worst we can expect from today’s online savings accounts.”
CDs
Grab a certificate of deposit now if you want to make more than a few pennies, but Tumin said you will have to act quickly before institutions lower their rates.
If you’re worried about keeping your finances stable during this period but want to chase a decent interest rate, you need to look for penalty-free CDs instead of the traditional ones that can charge huge early withdrawal fees.
Credit cards and car loans
Interest rates on credit cards and auto loans are expected to decline by an average of 16 basis points, or 0.16%, according to WalletHub forecasts. But this difference only matters for new accounts.
If you have a loan or credit card with a fixed rate, you will not see a decrease in the interest rate you pay on your monthly statement.
If you have a variable interest rate, you may see it decline, but not dramatically. For example, six months ago, the average credit card interest rate was 17.61%, according to CreditCards.com . Last week it was 17.08%.
Mortgage
WalletHub expects new mortgage interest rates to fall by an average of 52 basis points, or about half a percentage point. Again, this is for new and variable rate mortgages, not existing fixed rate mortgages.
This may be a great time to refinance, but if you haven’t started the process yet, you may be in trouble refinancing now that the Federal Reserve has cut rates so low.
According to a Wall Street Journal article, the Mortgage Bankers Association reported that refinancing applications recently hit their highest weekly level in nearly 11 years. In addition, lenders may not be able to handle the volume of refinancing applications, especially at a time when some firms may have limited capacity.