by Maurie Backman | Feb. 4, 2021
Low interest rates can be a mixed bag. Here's what you need to know.
On Jan. 27, the Federal Reserve announced that it will keep its benchmark interest rate near zero until the U.S. economy starts to pick up. For months, the U.S. economy has been sluggish and the unemployment rate uncomfortably high, thanks to the coronavirus pandemic. But what exactly does this decision mean for everyday consumers?
To be clear, the Federal Reserve establishes the federal funds rate -- the rate banks charge one another for short-term borrowing. The Fed doesn't officially set interest rates that apply directly to consumers. But there tends to be a strong correlation between the Fed's benchmark rates and consumer interest rates. Here are a few ways the Fed's announcement could impact you.
If you've had money in a savings account for some time, you may have noticed that you're not getting as high an interest rate on your cash as you once did. Unfortunately, low savings account rates -- and CD rates -- are an inevitable byproduct of the Fed's decision, which means that if you've socked away enough money to cover three to six months' worth of living expenses, you might consider putting your excess savings into a product that can give you a higher rate of return. Investing in a brokerage account, for example, could help you do a lot more with your money, despite the risks involved.
Many credit cards have a variable interest rate, which means the amount of interest you pay on your debt can fluctuate. By keeping its benchmark rate low, the Fed is also effectively helping to keep credit card interest rates lower. That's a good thing for people carrying a balance.
Low interest rates also translate to more affordable borrowing options. In fact, personal loan rates have come down recently, making them a more appealing choice for those who need money in a pinch.
Though the Fed doesn't actually set mortgage rates, it does influence how they trend. Mortgage rates have been at or near record lows since summertime, and the Fed news means they're likely to stay low for the foreseeable future. This gives home loan applicants a chance to lock in affordable monthly payments on a home purchase. It also makes it a good time for current mortgage borrowers to refinance their home loans. Of course, not everyone will qualify for a mortgage today, because some lenders are imposing tighter borrowing requirements for applicants. But if you have a great credit score, little existing debt, and a steady job, you may be in a good position to apply for a competitive new home mortgage or refinance loan.
While savers may lose out in the form of less bank account interest due to the Fed's recent announcement, the upside is that borrowing is likely to be more affordable in the near term. And while it's best to avoid unhealthy borrowing -- as in credit card debt -- it is good to have options.
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