The Federal Reserve approved its second federal interest rate cut on Nov. 7, and that’s good news. The rate range now sits at 4.5% to 4.75%. More cuts are expected in 2025, but how many and by how much remains to be seen.
An interest rate reduction means the Federal Reserve feels confident about the economy, and inflation is trending downward. But what does it mean on the ground for Gen Z? The news is variable. Here’s what to understand.
What Do the Rate Cuts Mean Generally
The interest on your existing debt – student loans, auto loans, and mortgages – may have a variable rate or a fixed interest rate. Fix-rate loan payments won’t change with the Fed rate cut, says Nicole Burdick, founder and financial advisor of Money Maven Financial. But variable-rate loans may see lower interest rates and corresponding lower payments . And if you’re in the market for a new loan or for refinancing existing loans, the Fed interest rate cuts could mean opportunities for lower interest rates.
Will the Reduced Interest Rate Help Your Holiday Shopping Bill
Holiday shopping is in full swing and for the average consumer, spending is up this season, according to an October Gallup poll, averaging around $1,000.
The prices you’re seeing are likely what you’ll pay unless you can catch a great sale. Factors like supply and demand and labor costs are macroeconomic elements influencing how stores price their merchandise, Burdick says.
“As you’re doing your holiday shopping, it’s more helpful to be mindful of how your behavior is impacted,” she suggests. “You may be tempted to spend more when using credit cards with introductory offers like 0% interest or no payments for 12 months because it feels like free money.”
Is it a Good Time To Get a Credit Card
Interest rates on credit cards could edge downwards with the Fed rate cut, but the effect is likely to be negligible for individual users, Burdick says. According to the Federal Reserve, the average credit card interest rate is historically high these days at more than 23%. Compare that to 2020, when it was less than 17%.
Credit card interest racks up fast, so carrying a balance each month can hurt. On an existing credit card, “it’s always worth calling to see if you can lower your interest rate, especially if you pay your credit card bills on time and have been with the company for a long time,” says Julie Beckham, financial education officer at Rockland Trust Bank. But the best way to save on interest is to pay your credit card bill in full every month.
If you’re carrying a balance that you can’t pay off in a timely way and your credit card company won’t come down, it could be worth transferring the balance to a card with a lower interest rate. “A lower interest rate allows more of your payment to go toward the principal, helping you pay it off faster,” Burdick says.
How Will the Rate Cut Affect Student Loans
If you plan to borrow federal student loans for Spring 2025 term, the recent Fed interest rate cut won’t affect the interest rate on loans borrowed before July 1, 2025. That’s because Congress sets the federal student loan interest rate each year, and the rate is fixed from July 1 to June 30 the following year. Congress has already set the interest rate for this academic year, and the Fed rate change won’t affect it. On July 1, 2025, Congress will set a new interest rate for the 2025-26 academic year. If you intend to borrow after June 30, 2025, you might see a rate change then.
On the other hand, private student loan interest rates could be affected by the Fed rate reduction. Private student loans are issued by private lenders, and the interest rates on private student loans lenders offer are typically variable. You might see a reduction in interest rates that reflects the Fed rate cut. However, the interest rates you are offered will probably depend more on your individual behavior like on-time payment history and credit history, experts say .
Is 2025 a Good Time to Get an Auto Loan
If you’ve been waiting for interest rates to come down before buying a car, the Fed interest rate cuts are a promising sign. According to Cox Automotive, we could see another rate cut in December but 2025 is less clear. If you need a car then you may not be able to put it off, but if you’re flexible, it could be worth waiting to see what 2025 brings. Keep an eye on interest rates and new policy changes at the federal level that could affect the cost of cars.
How Do Interest Rates Affect Interest on Savings Accounts
As interest rates come down, interest rates on high-yield savings accounts and CDs will also come down, but these accounts still offer a better return than a plain-Jane savings account. It’s worth calling your banking institution to ask if you’re earning the best interest rate available, Burdick says. “Don’t pass up earning interest.”
Regardless of the economy, it’s important to create and build an emergency fund with at least one month’s expenses, ideally three months or more. But don’t let perfect be the enemy of good. “I’m of the school of thought of ‘just start,’” Beckham says. Decide what you can afford to put aside from each paycheck into a separate savings account and automate it. “The satisfaction and security of knowing you can take care of yourself without getting into more debt or borrowing from family is gratifying,” she says.
How are Interest Rates and Credit Score Connected
The best way to get favorable interest rates is to develop a good credit score. Building your credit history and a favorable credit score takes time and you have to start small, Beckham says. That means on-time payments over time, staying below your credit limit, and developing a long credit history . “Concentrate on what you can control,” Beckham says. “We don’t have control over our country’s economy, but we do have control over our spending and saving habits.” A good credit score makes all the difference for favorable interest rates.