Experts Weigh In: Will the Fed’s Interest Rate Cut Make It Easier To Get Credit?
Written by
Jordan Rosenfeld
Edited by
Ashleigh Ray
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On Sept. 18, 2024, the Federal Reserve Board (The Fed) agreed to a half point interest rate cut, the first since March of 2020.
A rate cut can mean many things — not the least of which is that the inflation rate is likely calming down — and it may encourage consumers to borrow more. A big question in consumers’ minds is how this rate cut affects the ability to get credit.
“A Fed rate cut directly impacts credit accessibility by lowering costs, increasing loan approvals, impacting credit card rates and boosting economic confidence,” said Jimmy Himmelman, a certified financial education instructor (CFEI) and accredited financial counselor (AFC) at COMPACOM.
Read on to find out how this rate cut could impact your ability to get credit.
Lower Borrowing Costs
Since almost all interest rates are linked to the Fed rates, any change in these rates directly impacts interest rates across the board, Himmelman explained. Thus, credit becomes more affordable for consumers and businesses.
“A lower interest rate stimulates borrowing and consumer spending because consumers find it cheaper to finance purchases. It also allows businesses to invest in growth opportunities,” he added.
Increased Loan Approvals
With interest rates reducing across the board, Himmelman said lenders will become more willing to approve loans to eligible consumers.
He explained that lower monthly payments decrease the risk of default, so financial institutions will start relaxing their lending criteria and making it more convenient for consumers with marginal credit scores to obtain loans.
Credit Card Rates
Unfortunately, credit card interest rates are already high, so any reduction in the Fed rate does not significantly affect them.
“Since credit card rates are tied to the prime rate, they decrease whenever the Fed reduces its rates,” said Himmelman. “This can marginally lower the cost of carrying a balance on credit cards.”
Additionally, while credit card rates tend to move generally in the same direction as the Fed funds rate, “they aren’t in complete lockstep,” according to Richard Barrington, a financial analyst for Credit Sesame.
Barrington explained that the Fed and credit card companies have different goals.
He said, “The Fed is trying to influence consumer behavior. Credit card companies are trying to figure out how best to profit from that behavior.
“An important thing for consumers to remember is that credit card companies don’t all act in unison. So, times when rates are changing are good times to shop for a better deal on credit card rates.”
Economic Confidence
Perhaps most importantly, a lower interest rate structure boosts consumer and business confidence, Himmelman said.
“It makes borrowing more attractive, increasing overall spending and leading to a more confident economic outlook,” he continued. “Lower interest rates encourage consumers and business entities to take more credit and stimulate economic activity.”
Inflation May Be Low, But Not Gone
One caveat, however, Barrington said, is that consumers should not read a rate cut as a sign that inflation is calm for good.
“Fighting inflation is like fighting a forest fire — there are a variety of hot spots that could cause it to flare up again,” said Barrington.
“In the long run, inflation tends to be more harmful to most consumers than unemployment, so a flare-up of inflation could cause the Fed to be more cautious about cutting rates.”
Ultimately, while Fed rate cuts may help, Barrington said, “They only address a small amount of the problem, and in any case, they are beyond your control. Rather than waiting for the possibility of Fed rate cuts to lower your credit card bills, take matters into your own hands by paying down your debt.”
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