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Today's Personal Finance Report, Janna Herron, explains how changes in the Federal Reserve's interest rates affect your financial accounts.
USA TODAY

These Fed rates cuts are starting to increase, lowering the cost of many Americans using credit cards or taking out loans while squeezing on savers.

The Federal Reserve is set to lower its reference rate Wednesday by a quarter of a percentage point for the third time in the last three months. The move is expected to further trim borrowing costs on credit cards, equity lines, adjustable-interest mortgages and auto loans.

The latest reduction, from 1.5 to 1.75%, would undo just a third of the Fed's nine interest rate hikes from late 2015 to last year. But the interest rate cut campaign is starting to make a difference.

"The cumulative effect is growing," said Greg McBride, chief economist at Bankrate.com.

And while falling prices help borrowers, they also shoot down bank savings rates that had just begun to yield decent returns after years of gentle returns. It is frustrating for the elderly and others with fixed income.

"They try to stimulate the economy, but it's a bit like a tax on savers," said Richard Harrington, senior financial analyst at MoneyRates.com, a banking and consumer finance website owned by QuinStreet.

Barrington also questions whether the Fed's skeptical economic outlook and interest rate cuts will prompt some banks to withdraw loans, making it tougher for borrowers with higher risk of getting loans or eventually pushing up interest rates for these households.

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Prices for equity lines have fallen. (Photo: Elise Amendola, AP)

A look at how a Fed cut can affect these products:

Credit Cards

Credit card rates are generally tied to the prime rate, which in turn is affected by the Fed's reference rate. While interest rates will eventually fall by about a quarter of a percentage point, it will probably take two to three months, McBride says.

The Fed's two previous interest rate cuts since July have pushed average credit card rates down to 17.57% from 17.85%, Bankrate says, lowering the minimum payment on a $ 5000 credit balance by $ 1 to $ 2 a month. Another fall in the quarter would reduce payment by a further $ 1 a month, and still offset only a small portion of the increases already approved at $ 9.

Home Equity Lines

Most home lines of credit, or HELOCs, also track prime rates. The two previous Fed cuts since July lowered the average HELOC rate from 6.73% to 6.23%, shaving the monthly payout of a $ 30,000 home equity by $ 12.50, according to Bankrate.

A third reduction Wednesday, which would show up in HELOC interest rates in a month or two, the shares would have another quarter, or $ 6.25, bringing the total savings from the three Fed moves to almost $ 20, says McBride. Although the monthly payout is still $ 37 higher than before the Fed began to hike rates in 2015, recent savings are starting to increase.

"Today's Fed interest rate cuts will soon make it cheaper to fix your home as sellers prepare for the 2020 shopping season," says NerdWallet analyst Holden Lewis.

Adjustable rate loans

Unlike credit cards and HELOC, interest rates on mortgage loans with adjustable interest rates change annually. So the impact of the Fed's interest rate cut, and more on the horizon, can hit all of a sudden on your next scheduled loan adjustment – that's what happened when interest rates rose.

A percentage point cut in the Fed's policy rate in the short term over 12 months – assuming the Fed lowers interest rates again within months – is likely to reduce the adjustable rate by half a percentage point because they are also affected by other factors. That would reduce the monthly payment of a $ 200,000 loan by $ 56, says Tendayi Kapfidze, chief economist at LendingTree.

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Fixed rate loan

The Fed's short-term interest rate affects 30-year mortgage – the most common mortgage – and other long-term interest rates only indirectly. These rates closely track inflation expectations and the long-term economic outlook, and have already dropped significantly in recent months as concerns about the economy and low inflation have grown. The average has fallen to 3.75% from 4.86% a year ago, according to Freddie Mac, although it has recently changed to ease trade tensions and signs that inflation may be picking up.

Since the Fed's quarterly cut in September, average mortgage rates have fallen 0.16 percentage points, says Kapfidze.

Auto Loans

When the Fed raised interest rates, the higher borrowing costs did not always go to car buyers because the manufacturers offered discounted financing to encourage sales. Now that vehicle sales have slowed down, car manufacturers are competing even more strongly with each other. As a result, some lenders are likely to pass Wednesday's likely Fed rate cut to car buyers over the course of weeks, though the average fall may not reflect the full reduction.

The Fed's two quarterly points have fallen since July, for example, pushing the average rate on a five-year car loan to 4.61% from 4.66%, according to Bankrate. Expect a similar fall after Wednesday's move, and lower the monthly payout on a new $ 25,000 car by just $ 3 a month after incorporating all three cases since July.

Student Loans

Many private student loans have variable interest rates that follow the prime rate. When the loan interest rate is adjusted depends on what is written in the loan terms. For example, the monthly payment will be reduced for those who have a regular repayment plan. However, if you have an income-repayment plan, your monthly payment will not change, but a lower portion will go toward interest rates rather than the principal.

Federal student loans have a fixed interest rate set by Congress and are not affected by the Fed's move.

Bank savings rates

Bank customers who have finally begun to take advantage of higher savings rates could see some of these gains harden in the future. Rates of one-year and long-term deposit certificates began to fall in anticipation of the Fed's interest rate in July, said Ken Tumin, founder of DepositAccounts.com.

Banks move fast on such long-term accounts because they do not want to be stuck and pay higher returns for longer periods when interest rates fall, McBride says.

Meanwhile, online banks, which have paid much higher interest rates on money market and savings accounts, are likely to reduce interest rates within a month or two of any Fed interest rate cut as profit margins narrow. A study Tumin conducted during Fed interest rate cuts in 2007 found that banks initially lowered their savings by roughly half the size of the Fed cut and then caught up to match the central bank's move within several months.

Marcus, Goldman Sachs' retailer, has trimmed the savings account rate to 1.9% from 2.25% before the Fed cut, and Ally has cut its return to 1.8% from 2.2%. Online banks offer, on average, interest rates from 2 to 2.25%, down from 2.25% to 2.5% before the Fed's move in July, McBride says. They are likely to push a little further after Wednesday's action, he says.

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