Consumer impact will be mixed

The federal funds interest rate, the one cut yesterday by the Federal Reserve, is what banks charge one another for overnight loans to boost their cash reserves. But what does that mean for you?

First, a cut in the federal funds rate typically prompts banks to immediately cut the rate they charge their most creditworthy borrowers, the prime rate. Credit cards and home equity lines of credit held by the rest of us often are pegged to the prime.


But it might be some time before you see those benefits. And some interest rates paid by consumers have little or nothing to do with the rates the Fed controls.

Here's what to expect.


Credit cards: You likely won't see a lower rate on your plastic if you have a fixed-rate card. Most consumers have a variable-rate card tied to the prime. Still, don't expect an immediate rate cut.

"Credit card issuers are quick to pass on a rate increase but drag their feet when interest rates are headed lower," says Greg McBride, senior financial analyst with Bank-

"It can take up to 90 days before the lower rate is reflected on your credit card statements."

The size of your rate cut will depend on your creditworthiness. In fact, if you're paying a high penalty rate for making late payments, don't count on a rate cut at all. Penalty rates now top 30 percent.

Home equity lines: Expect to see a rate decrease as early as next month's statement, McBride says.

Before yesterday's action, the rate on home equity lines of credit for consumers with high credit scores averaged 7.44 percent, slightly higher than the prime rate, according to Bank-

The most creditworthy customers could see their rate drop 0.75 percentage points, the same as yesterday's cut in the Fed funds rate.

Higher-risk borrowers might see a quarter- or half-point cut, McBride says.


Mortgages: If your adjustable-rate mortgage is about to reset, you could find your new rate is lower - though the federal funds rate's role in this is indirect at best. Fixed-rate mortgages have little to do with the federal funds rate.

Adjustable-rate mortgages for creditworthy borrowers are tied to the one-year Treasury bill. This short-term bond moves largely in expectation of where interest rates are headed in the next 12 months, McBride says.

So, as the Fed has cut rates in past months, the one-year Treasury bill has dropped. The rate fell from 5 percent in July to 2.7 percent now, McBride says.

Fixed-rate mortgages are tied to 10-year Treasuries. These are more affected by the economic outlook and inflation than any moves by the Fed, McBride says.

Auto loans: Don't look for much change here.

Rates on auto loans are fixed, so current borrowers won't see lower rates.


Even new borrowers might not notice a difference, because auto loans sometimes aren't tied to a specific interest rate and can vary among companies and dealers, says David Resler, chief economist with Nomura Securities in New York.

Even if auto loans are tied to the prime rate, which some are, a three-quarter-point drop is not enough to make much of a difference, McBride says. The rate cut, for example, would save $9 a month for someone borrowing $25,000 for five years.

"Nobody is upgrading to a luxury sedan because someone is saving $9 a month," McBride says.

Certificates of deposit: When the Fed cuts interest rates, it becomes cheaper for banks to borrow money. That means they don't need to pay as much to get deposits to loan.

CD rates have already dropped or will do so by next week, McBride says.

"There's no benefit to waiting if you're looking to lock in a CD. Do it now," McBride says.