How a 'Near Zero' Interest Rate Affects Your Money
The Federal Reserve announced on Sunday that it would cut interest rates to near zero, with the benchmark for consumer interest rates to drop to between 0% and 0.25%.
It’ll likely remain at this level until “the economy has weathered recent events,” according to a Federal Reserve press release.
But that doesn’t mean you suddenly get an interest-free holiday for your debt or a super-cheap mortgage. That Federal Reserve-designated rate is a guideline, not an across-the-board mandate, and it’s more complex in practice than it might seem at first glance.
Here’s what you can expect to happen to your financial accounts in the next few weeks.
Checking and savings accounts
You may see a reduction in the interest rate for your checking or savings account, but you won’t lose your ability to earn interest completely.
Ken Tumin, banking expert at DepositAccounts.com, said that online savings account rates may hold steady near the 1% range, if the last recession is any indication.
“During the 2008-2015 zero rate days, most online savings account rates remained in a range of 0.70% to 1.00%,” he said by email. “If history repeats, that may be the bottom we can expect from today’s online savings accounts.”
CDs
Grab a certificate of deposit now if you want to earn more than a few pennies for the effort, but Tumin said you’ll have to move fast before institutions cut their rates.
If you’re worried about keeping your finances stable during this period but want to chase a decent interest rate, you’ll want to look for no-penalty CDs instead of traditional ones that can charge a hefty fee for early withdrawal.
Credit cards and auto loans
Interest rates for credit cards and car loans are expected to decrease by an average of 16 basis points, which translates to 0.16%, according to projections by WalletHub. But that difference only matters for new accounts.
If you have a fixed-rate loan or credit card, you won’t see a decrease in the interest rate you pay on your monthly statement.
If you have a variable interest rate, you may see your rate decrease, but not drastically. For example, six months ago, the average credit card interest was 17.61%, according to CreditCards.com. Last week, it was 17.08%.
Mortgages
WalletHub expects interest rates for new mortgages to decrease by an average of 52 basis points, or about half a percent. Again, this affects new mortgages and mortgages with variable interest, not existing fixed-rate mortgages.
It could be a great time to refinance, but if you haven’t already started the process, you may have a hard time refinancing now that the Federal Reserve has dropped rates so low.
The Mortgage Bankers Association said refinancing applications recently hit their highest weekly level in almost 11 years, according to a Wall Street Journal article. And lenders may find themselves unable to to handle the volume of refinancing applications—especially during a time when some firms may be operating at reduced capacity.
This article was written by shared by Lisa Rowan to Lifehacker and Lisa Rowan on Two Cents from Lifehacker and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
