The Federal Reserve announced Wednesday that it will cut its benchmark interest rate by another quarter point, or 25 basis points. This marks the third straight rate cut — and all together cuts a full percentage point off the federal funds rate since September.
For consumers struggling under the weight of higher borrowing costs after a series of 11% interest rate increases between March 2022 and July 2023, the move comes as good news — although it may be some time before lower interest rates noticeably impact budgets. Captivity.
“Interest rates took the elevator up in 2022 and 2023, but they took the stairs down,” said Greg McBride, chief financial analyst at Bankrate.com.
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Although many people, in general, feel better about their financial situation heading into the new year, nearly 9 in 10 Americans believe inflation is still a problem, and 44% believe the Fed has done a poor job of controlling Yes, according to a recent report. Recent survey conducted by WalletHub.
“Add in talk of broad tariffs, and you have a recipe for unstable borrowers,” said John Kiernan, managing editor of WalletHub.
At the same time, higher interest rates have affected all types of consumer borrowing costs, from car loans to credit cards.
A 0.25 percentage point cut in December will lower the Fed's overnight borrowing rate to a range of 4.25% to 4.50%. Although this is not the rate that consumers pay, the Fed's moves still affect the borrowing and saving rates that consumers see every day.
From credit cards and mortgage rates to car loans and savings accounts, here's a look at how the federal funds rate cut will affect your finances next year.
Credit cards
Most credit cards have a variable interest rate, so there is a direct connection to the Fed's standard. Due to a cycle of central bank rate hikes, the average credit card rate has risen from 16.34% in March 2022 to more than 20% today – near an all-time high.
Since the central bank started lowering interest rates, the average interest rate on credit cards has risen from very high levels.
“Another rate cut is welcome news at the end of a chaotic year, but ultimately it doesn't mean much for those with debt,” said Matt Schultz, credit analyst at LendingTree. “A quarter-point reduction could shave a dollar or two off your monthly debt payments. It certainly doesn't change the fact that the best thing cardholders can do in 2025 is take matters into their own hands when it comes to higher interest rates.”
Instead of waiting for small adjustments to the APR in the coming months, the best move for those with credit card debt is to consolidate with a 0% balance transfer card or a low-interest personal loan, Schulz said.
Otherwise, ask your card issuer for a lower rate on your current card — “this works more often than you think,” he says.
Customers shop for groceries at a Costco store on December 11, 2024 in Novato, California.
Justin Sullivan | Getty Images
Car loans
Auto loan rates also remain high, with auto loan rates for used cars averaging 13.76%, while new car rates are at 9.01%, according to Cox Automotive.
Since these loans are fixed and will not adjust to a rate cut by the Fed, “this is another case where taking matters into your own hands is your best move,” Schulz said.
In fact, anyone planning to finance a car may be able to save more than $5,000, on average, by shopping around for the best rate, a 2023 LendingTree report found.
Mortgage rates
Because interest rates on 15- and 30-year mortgages are fixed and mostly tied to Treasury yields and the economy, they are not in line with Fed policy.
As of the latest tally, the average rate on a 30-year mortgage rose to 6.75% from 6.67% for the week ending Dec. 13, according to the Mortgage Bankers Association.
“Mortgage rates have gone up — not down — since the Fed started cutting rates in September,” Bankrate's McBride said.
“With expectations of interest rate cuts in 2025, long-term bond yields have renewed their move higher, bringing mortgage interest rates back to nearly 7%,” he said.
But since most people have fixed-rate mortgages, the interest rate will not change unless they refinance or sell their current home and buy another property.
Anyone shopping for a home can still find ways to save.
For example, a $350,000 30-year fixed mortgage loan at an average rate of 6.6% would cost $56 less each month compared to the November high of 6.84%, according to Jacob Channel, chief economic analyst at LendingTree.
“This may not seem like a lot of money at first glance, but a discount of about $62 per month translates to a savings of $672 per year and $20,160 over the 30-year life of the mortgage,” he said.
Student loans
Interest rates on federal student loans are also fixed, so most borrowers won't find much relief from interest rate cuts.
However, if you have a private loan, these loans may be fixed or have a variable rate tied to a Treasury bill or other rates. As the Fed lowers interest rates, interest rates on private student loans will fall over a period of one or three months, depending on the benchmark, according to higher education expert Mark Kantrowitz.
However, “a quarter-point rate cut would reduce monthly loan payments by about $1 to $1.25 over 10 years, or about 1% in total loan payments,” Kantrowitz said.
Eventually, borrowers with variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan would give up the safety nets that come with federal loans, such as deferrals, forbearances, income-based repayment, and loan forgiveness and discharge options.
Additionally, extending the loan term means you'll end up paying more interest on the balance.
Savings rates
While the central bank has no direct influence on deposit interest rates, returns tend to be tied to changes in the target federal funds rate.
As a result of previous interest rate hikes by the Fed, interest rates on higher-yield online savings accounts have made big moves and are still paying as much as 5% — most savers have been able to profit in nearly two decades — up from about 1% in 2018. 2022, according to Bankrate.
“The possibility that the Fed will move at a slower pace next year is better news for savers than for borrowers,” McBride said. “The most competitive returns on savings accounts and certificates of deposit continue to easily exceed inflation.”
The average rate for one-year CDs is now 1.74%, but rates for higher-yield CDs pay more than 4.5%, according to Bankrate, which is almost as good as a high-yield savings account.
