Consumers to benefit differently from cut

Stephanie Armour and Sandra Block
USA Today
May. 1, 2008 12:00 AM

The Fed's interest-rate cut on Wednesday, its seventh since September, could bring different benefits to different consumers.

The average rate on a home-equity line of credit, for example, fell to 5.7 percent last week from 7.3 percent in January, Bankrate.com said; the average on a home-equity loan was 7.73 percent.

Those rates move in direct response to Fed cuts, so they could fall further this week.

Other effects on consumers:


• Possible relief ahead for savers. As is usually true when the Fed cuts, savers with certificates of deposit will see lower rates, though their discomfort could end soon if the Fed halts its rate cutting.

"We are at or near the bottom on CD yields," McBride said.

"If the Fed moves to the sidelines, that will be the first good news savers have had in a long time."

Last week, the average 1-year CD rate was 1.93 percent, Bankrate.com said. But to try to draw more deposits, some financial institutions are dangling much higher rates, McBride said, so savers should shop around.


• Some credit-card holders win. Consumers with variable-rate credit cards could benefit, because those rates also tend to move in lockstep with the Fed, McBride said. But the lower rates will be restricted to those with top-notch credit.

Saddled with losses from other consumer loans, banks have sharply raised rates for customers considered risky, even if they've paid their bills on time and have decent credit.


• Easing payments for some subprime borrowers. Many subprime loans are ARMs that impose much higher payments once they reset.

Nearly 90 percent of subprime mortgages issued from 2004 to 2006 charge low rates that rise rapidly after a year or two, the Center for Responsible Lending said.

A majority of subprime mortgages are tied to the three-month LIBOR (the London interbank offered rate). That rate has dropped from 5.4 percent in July 2007 to 3 percent in April.

For many prime borrowers, too, Fed cuts have meant lower resets on their ARMs.

Before the housing boom peaked in 2005, many buyers were able to buy homes by taking on ARMs that carried low payments that would escalate once the rates reset. And 2008 marks a peak when a huge chunk of those loans will reset; many loans that originated in 2006 reset this year.