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How do interest rate changes affect consumers?

September 18, 2007 2:14 PM

ABC’s Charlie Herman blogs:

The Federal Reserve met today and lowered the federal funds interest rate by half of a percent from its current level of 5.25%.

The Fed funds rate is the interest rate banks charge each other for overnight loans.

But how does it affect consumers?

Credit Cards:
* Variable rate cards are set using a formula tied to the prime rate. But most variable rate cards don’t “float”. They shift at various, fixed times throughout the year. Also, fixed rate cards make up the majority of the market so there’s not as much of an effect as one might expect in the overall market.

Mortgages:
* Not tied to the Fed funds rate, but tend to track various U.S. Treasuries. Treasuries, however, can be influenced by the Fed's action today.

Home Equity Lines of Credit:
* Most of these types of loans are tied to the prime rate, so they would be directly impacted.

Car Loans/Leases:
* Fixed rate instruments that are generally tied to the 3 and 5-year treasuries. If you have a loan, they price won’t increase, but NEW purchases would likely be impacted.

Student Loans:
* Not affected. The Federal government prices student loans once a year (in June) based on the rates on the 91-day T-Bill rates.

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