How the Fed’s rate moves affect an average couple’s finances

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Interest rates have been falling since January and with this latest cut, the prime rate is at its lowest level since 1994.

But, you wonder, how does this economic maneuvering affect me?

Joe and Jill Bankrate will tell you.

They are our very-average, imaginary couple — complete with a mortgage, credit cards bills, a couple of new cars and some money in the bank earning interest.

To illustrate how the Federal Reserve Board’s moves on interest rates affect their monthly expenses and income, we have projected Joe and Jill’s expenses based on national averages, using the latest interest rate information from’s rate tables.

We used the rates from last May, which is when the Fed stopped its year-long policy of raising rates to stem inflation, and the Bankrate information from May 11, 2001.

You’ll see that some monthly expenses take several weeks or even months to be affected by rate changes. While others, such as mortgages, are affected more quickly.

The Bankrates’ home
Since mortgage rates move in anticipation of rate changes by the Federal Reserve Board, that’s where the biggest change has occurred. If our Bankrate couple had waited to finance their mortgage or had refinanced their mortgage in the last couple of weeks, their savings would have been significant.

It’s not the same picture for rates on home equity loan products or credit cards. The rate changes for these products lag behind the Fed’s moves — and how long depends on the individual institution’s policies. Generally, home equity loans take several weeks before the new prime rate catches up with loan rates. Given the volatile environment over the last few months coupled with the January slash in rates by the Federal Reserve Board, rates have fallen fairly steadily, and we can expect them to fall even more.

table below illustrates the two types of home equity loans, the fixed home equity loan and the open-ended, variable, home equity line of credit. Joe and Jill chose to pay off only the interest on their HELOC and the chart shows their payment based on interest-only payments for 10 years. If they had chosen a fixed home equity loan, their entire loan balance would be paid out over 15 years.

The Bankrates’ credit cards
As for credit card debt, the card issuer’s rate adjustment generally moves much slower than the Fed changes, since most credit card issuers re-price interest rates after a change in prime. Depending on the policy of your financial institution, it could be several weeks or even months to see a change in rates.

For our couple, the variable rate on their standard credit card is lower now — by over a half percent — than the rate they were paying last year at this time. Their total credit card debt is based on the average outstanding balance for people who revolve debt monthly, at $5,610.

The Bankrates’ nest egg
Unfortunately, the rate cuts by the Federal Reserve Board have had an adverse affect on our couple’s savings account. And, the change in the rate was fairly swift. We calculated their savings on a deposit of $5,000 in a one-year certificate of deposit that the couple purchased this month. If they had made their investment last May, they could have locked in a yield of 5.54 percent. Today they are earning only 3.90 percent.


Difference the Fed makes in what the Bankrates pay for loans


% rate


2000 payment



% rate


2001 payment


($125,000, 30 years, fixed rate)

$136.41 per month
$48,998.35 over the life of the loan
Home equity line of credit
($30,852, paying interest only for 10 years)
$41 per month
$4,874 over the life of the loan
Home equity loan
($34,318, 15 years)
$21.25 per month
$3,734 over the life of the loan
Auto loan
($20,000, 48-month new car loan)
$2.86 per month
$137 over the life of the loan
Credit cards
($5,610 balance, goal of paying it off in three years)
$1.83 per month
$66.09 over three years
Difference that the Fed makes in what the Bankrates earn


% rate

Annual interest


May 2001

% rate

Annual interest earned
Certificate of deposit
(1-year CD, $5,000)
Sources: weekly surveys, Consumer Bankers Association

— Updated: May 15, 2001