Make the Most of Falling Rates
Borrowers with good credit can get deals on loans now.
Now is a good time to re-assess all your revolving debt and borrowing. On January 22, the Federal Reserve lowered its benchmark interest rate to 3.5% from 4.25% -- the biggest one-day rate cut in 18 years -- to calm financial markets reeling from fears about a U.S. recession. But borrowers with respectable credit scores will benefit as well because they will spend less on car loans, credit-card debt and in many cases, mortgages.
The better your credit score, the better your opportunity to take advantage of falling interest rates. Many borrowers with variable rates benefit automatically when rates ratchet downward. You're also in a good position to bargain for lower rates if lenders want you as a customer.
You don't need a perfect credit score -- 850 on the FICO scale. Borrowers with a score of 720 or above can cherry-pick the best deals on credit cards, car loans and mortgages.
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Credit cards. If you have a variable-rate credit card, you're already reaping the benefits of falling rates. The average interest rate on variable-rate cards has fallen from 14% in September to less than 13% in early March, reports Bankrate.com. But the benefit from a Fed cut can take up to three months to be reflected in your variable rate.
Card issuers aren't eager to lower rates on fixed-rate cards, but it's worth a try. Scott Bilker, founder of DebtSmart.com, recommends that you call your lenders, cite the Fed's move to cut rates and ask for a better deal.
You'll still have plenty of 0% interest offers to use as leverage. If that doesn't work, transfer your balance to the best 0% offer that comes your way. "This is an environment in which shopping around to reduce the cost of your credit-card debt can pay off nicely," says Greg McBride, senior analyst with Bankrate.com.
Car loans. The Fed's interest-rate moves will eventually trickle down to car loans and financing incentives offered by automakers. But those deals will be targeted to buyers with good credit, says Jesse Toprak, an analyst with Edmunds.com.
Plus, incentives will be doled out selectively, usually by domestic manufacturers and on models that aren't top sellers. You might get a break on slow-selling large SUVs, but not on hybrids, popular new models or sexy imports.
In any case, any drop in rates probably won't be big enough for you to upgrade your ride. Falling interest rates don't have a big impact on affordability for car buyers because the loan balance is repaid over a shorter time than a mortgage.
If you borrowed, say, $25,000 on a five-year car loan, even a difference of one full percentage point in the interest rate saves you just $12 per month. "Nobody is going to upgrade to a luxury sedan on the basis of $12 per month," says McBride.
Savings accounts. Although falling interest rates may be good news for borrowers, it's a different story for savers. From the time fo the Fed's January rate cut to early March, the average rate on a one-year certificate of deposit has fallen from 4.19% to 2.35%, according to Bankrate.com.
But some banks are slower to cut their yields on savings accounts and certificates of deposit because they want to attract consumer deposits. "It's a lot cheaper for banks to pay 4.5% on a CD than it is to raise funds in the credit markets," says McBride.