Federal Reserve Chair Jerome Powell recently hinted at an impending interest rate cut, signaling a potential quarter-point reduction in September. The decision comes after the central bank leader emphasized the need for policy adjustments during his keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming. As Americans grapple with high interest charges, the anticipated rate cut could offer some relief, especially with proper preparation. While there is a 1-in-3 chance of a more aggressive half-point cut, according to the CME’s FedWatch measure of futures market pricing, individuals are advised to take proactive steps to maximize their financial strategies before the rate adjustment takes effect.
Leslie Tayne, an attorney specializing in debt relief at Tayne Law in New York and author of “Life & Debt,” emphasizes the importance of evaluating spending habits and exploring growth opportunities for one’s finances. With the current federal funds rate at its highest level in two decades, ranging from 5.25% to 5.50%, a potential rate cut in September would mark the first time officials have lowered the benchmark in over four years. Ted Rossman, senior industry analyst at Bankrate.com, notes that the transition to lower interest rates will be gradual, contrasting the swift series of interest rate hikes that raised the federal funds rate by 5.25 percentage points in 2022 and 2023.
### Strategize paying down credit card debt
A rate cut typically leads to a decrease in the prime rate, subsequently lowering interest rates on variable-rate debt such as credit cards. While this may reduce monthly payments, APRs are unlikely to drop significantly from their current high levels. For instance, the average interest rate on a new credit card stands at nearly 25%, according to LendingTree data. By paying $250 per month on a card with a $5,000 balance at this rate, individuals could incur over $1,500 in interest over 27 months. If the central bank implements a quarter-point rate cut, the savings would amount to $21, enabling the payoff of the balance one month earlier. Matt Schulz, chief credit analyst at LendingTree, suggests exploring alternatives like zero-interest balance transfer credit cards or consolidating high-interest credit cards with lower-rate personal loans to address debt more effectively.
### Lock in a high-yield savings rate
As rates on online savings accounts, money market accounts, and certificates of deposit are expected to decline, experts recommend securing some of the highest returns in decades before the reduction takes place. Despite the upcoming decrease, top-yielding online savings accounts currently offer returns exceeding 5%, surpassing the rate of inflation. By moving funds from a traditional account paying an average of 0.46% to a high-yield account with an interest rate of 2.5% or higher, savers with around $8,000 could earn an additional $200 annually. Greg McBride, Bankrate’s chief financial analyst, advises against waiting for improved returns later and encourages locking in competitive CD yields now to maximize earnings.
### Consider the right time to finance a big purchase
Individuals planning significant purchases like homes or cars may benefit from waiting for lower interest rates to reduce financing costs. Although mortgage rates are fixed and linked to Treasury yields and the economy, recent declines indicate potential savings on future loans. For instance, a 30-year fixed-rate mortgage currently averages under 6.5%, down from a peak of 7.22% in May. This decrease could translate to monthly savings of $171 on a $350,000 loan, equating to $2,052 annually and $61,560 over the loan’s lifetime. However, McBride warns that lower mortgage rates might also drive home prices up due to increased demand, offsetting the affordability advantage for prospective buyers. The housing market’s future trajectory remains uncertain, contingent on the extent of mortgage rate reductions and available supply.
### Assess the right time to refinance
With the potential rate cut, individuals struggling with existing debt may find refinancing options more appealing. Private student loans, typically featuring variable rates tied to prime or Treasury bill indexes, are likely to see decreases as the Fed adjusts interest rates. Borrowers with variable-rate private student loans could eventually refinance into more affordable fixed-rate options, offering greater stability. Mark Kantrowitz, a higher education expert, notes that current fixed rates for private loan refinancing range from 5% to 11%. Nevertheless, refinancing federal loans into private student loans entails forgoing federal loan benefits like deferments, income-driven repayment plans, and loan forgiveness options. David Peters, founder of Peters Professional Education, advises borrowers to maintain their original payment amounts post-refinancing to reduce the principal without affecting cash flow significantly.
### Perfect your credit score
Individuals with strong credit profiles may already qualify for lower interest rates, enhancing their financial prospects. While inflation has driven up financing costs for auto loans, focusing on improving credit scores can lead to better loan terms. McBride highlights the impact of credit scores on loan affordability, emphasizing that paying down revolving debt and boosting creditworthiness can pave the way for more favorable financing terms. By prioritizing credit score improvement, consumers can position themselves for better loan offers and potentially lower interest rates, ensuring long-term financial stability.