There's no doubt you've heard the news by now: The Federal Reserve recently cut the federal funds interest rate by half a point — twice the expected amount. They took the step (a biggie, as it's the first key interest-rate cut since 2003) in response to the mess that is this country's mortgage and credit market.There was a lot of buzz leading up to the cut, with predictions flying on television and in newspapers. But what does it mean, and more importantly, how will it affect your wallet? No worries. The cut is good at best and neutral at worst, so there are really no losers here. The interest rate that the Fed charges to banks when it loans them money was scaled back to 4.75 percent. That means that banks and other major lenders should be passing that savings on to you, although it may be a few months before you notice a difference on your bills. While it won't add up to much, every little bit helps. “If you're one of those people who has a personal balance sheet that's a mess, if you have more debt than you'd like to, this is a real opportunity,” explains John Ulzheimer, president of educational services for Credit.com. Simply put, you're going to pay less interest on the money that you owe or borrow in the future. That doesn't give you a free pass to take on more debt, though. The rate cut is a boon to many, but it's not significant enough to make a huge dent in the amount you owe. What it could do, though, is give you the boost you need to stay afloat in a sinking market. And if you've been consistently rolling along without much trouble so far, you may now have the ability to pay off your bills, and thus get out of debt, a bit faster. Here's where you'll likely see a difference:Interest-only loans
If you have one of these, there's a good chance you'll see your payment either stop increasing or fall slightly. A home equity line of credit, for example, is tied fairy closely to the federal funds rate, says Ulzheimer. The relief of discounted or at least stagnant payments can be huge if you're among the millions of people who are feeling the squeeze of the current market. If you're not, consider continuing to pay the old amount, but applying the difference to the principle on your loan.If you can swing it, you'll find yourself out of the loan much faster: One extra payment a year can reduce a 30-year mortgage by six or seven years and save you thousands of dollars in interest. The catch? Some companies will try to enroll you in what's called an accelerated payment plan, then charge you a fee to sign up, robbing you of some of the potential savings. Look on the statement that comes with your bill each month; in many cases, it will have a field where you can pay extra. Direct the company to apply that amount to the principle. Variable-rate credit cardsYou might have one of these and not even know it, so next time you get a statement in the mail, do yourself a favor and read it. Better yet, dial up the company right now and ask what kind of interest rate your card carries. A variable rate means that the APR changes from time to time without notice, usually because it's tied to another rate like prime — a plus, at least in this case. “This is good news for those whose card issuers are going to pass on the savings from this rate cut to their customers,” says Ulzheimer. Unfortunately, there are no guarantees here, but if you don't see a change in the rates on your cards in the next couple of months, call and negotiate with the company. If you have a strong track record of paying your bill on time each month, chances are good that they'll cut you a break.
The same rules apply: If your payments are reduced, there's no harm in paying a little extra if you can afford it. You'll cut down on the money you're throwing away to interest, and get out of debt significantly faster, depending on how deep you are and how much extra you can afford to pay each month.Adjustable-rate mortgages. It's estimated that at least 2 million ARMs will jump from low, teaser rates to higher rates over the next two years. While the Fed's cuts won't come close to grounding that jump, it will provide a small amount of relief. “Your ARM rate will likely come down a bit, since it's a variable-rate instrument. But most reset monthly, so you may not get the benefit until the next month,” says Brad Stroh, founder of Bills.com. If you combine that break, which is small but still noteworthy, with some other cuts in your budget, you just might be able to make it. If you can't, consider refinancing with the lowered rates if you can get a better deal. “Just remember that when you refinance, you reset the clock, so you have the payment, albeit lower, for another 30 years,” warns Ulzheimer.
Auto loansIf you're already in one, you're not going to see your rate fall. But if you're in the market for a new car, you will see lower interest rates on the loans offered to you. And if you can wait a few months before you make the purchase, go ahead and do it. Economists are predicting another rate cut, this time for .25 percent (one-quarter of a percent), by the end of the year. The Federal Reserve meets again at the end of October.With reporting by Arielle McGowen.
Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for Life magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .