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What Does a Fed Rate Cut Mean for Young Savers and Shoppers?


The Federal Reserve cut interest rates again on Tuesday. What exactly, do the rate changes mean for us in our twenties, paying off debts, tucking away pennies, and perhaps shopping for a first home?

When the Fed cuts the prime interest rate, it will either help you or hurt you, depending on your current financial goals.

Savers

Generally speaking, if you’re trying to save or invest for the future, a Fed rate cut is going to put some sludge in your savings pipeline. Stocks may falter, and banks lower the interest rates paid out on savings and money market accounts. Many high yield online savings accounts like ING, HSBC, and EmigrantDirect, have lowered the rates paid to savers this year. HSBC, for example, is down from 5.05% to 4.5% so far this year.

What can you do? As rates drop industry-wide, you might not be able to find a better rate elsewhere. You might consider stashing a little extra away to meet your savings goals or moving some of your savings into the stock market.

Credit Card Debtors

If you’re chipping away at an old credit card balance, the Fed rate cut is good news for you, as it means the interest rate on any variable-rate credit cards will go down. Of course, the quarter-percent drop in the interest rate is unlikely to make much of a dent in your finance charges.

What can you do? As always, be on the lookout for the fastest escape route from high interest credit cards. Transfer balances to a new credit card if you can, and pay off debt as soon as possible.

Home Buyers

If you’re shopping for a new home, the Fed interest rate cut is great news. The lower interest rate will impact both fixed- and adjustable-rate mortgages (ARMs) and, unlike with credit cards, a quarter-percent rate drop can spell significant savings on a 30-year home loan.

What can you do? If you have been putting off buying a home, now might be the time to start looking. Rates are going down and the market is soft in most parts of the country. The only catch? Due to the recent credit crisis and rising foreclosures, lenders are far more cautious about approving loans. You’ll want to make sure your credit history is up to snuff before looking for a home loan.

Car Shoppers

There is good news for anybody in the market for new wheels, although it’s not just due to the Fed rate cuts. Yes, the interest rate reduction will trickle down to auto loans, but since most auto lenders do not have a direct relationship with the Federal Reserve, any reduction in auto loan rates is secondary to other loan rates.

However, the slowing economy and rising oil prices has left auto manufacturers and dealers hurting, meaning they are more likely to offer incentives on new model cars over the next year.

What can you do?
Start saving a down payment and get your credit in order, as 2008 might be a great time to buy a car.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.