Over the last few years, the Fed has been paying attention to various economic indicators to determine how to proceed with interest rate decisions, one of which is job creation in the United States.
When a jobs report finds that fewer positions were added than expected, it can lead to the Fed lowering rates to prompt economic growth, which, in turn, creates opportunities to improve your financial situation.
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“The Fed funds rate sets the base for most interest rates,” said Jay Zigmont, PhD, a certified financial planner and founder of Childfree Trust. “In banking, Fed funds are seen as the rate you get for a risk-free return.” Basically, whenever a bank makes a loan or issues a credit card, it increases the interest rate above the risk-free rate to reflect the risk it’s taking.
GOBankingRates consulted with financial experts to determine five ways that rate cuts caused by fewer jobs will trigger changes that can improve your finances.
You Spend Less Money On Interest
“Variable-rate products, such as a credit card, will change their rates over time as Fed rates go down,” said Zigmont.
That’s good news for anyone carrying certain types of credit card, mortgage or car loan debt. In simple terms, fewer jobs means that the Fed would likely consider cutting rates to boost consumer and business spending, ultimately creating more economic activity, and thus, demand for labor. Chris Motola, a financial analyst at National Business Capital, rate cuts exert direct downward pressure on credit card interest rates.
“Car loan rates are also affected,” he said, “though, generally not as quickly.”
If rates drop to stay competitive, you’ll lose less money to interest. Apply that money to the principal debt, and you could speed up how quickly you pay off outstanding loans.
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You Could Look Into Refinancing Your Major Loans
Even fixed-rate borrowers could benefit from the rate drop in the form of a refinancing opportunity.
“If you have fixed-rate loans, such as a mortgage or student loan, your rates won’t change as the Fed rates do,” warned Zigmont. “It may give you options for refinancing as rates come down, but you need to refinance to get the new rate.”
If you’ve been trapped in high interest rates without significantly paying down the debt, your opportunity for a better deal has arrived.
“At a certain point, after there is a significant decrease in interest rates, it can be in your best interest to refinance a loan, especially a mortgage,” said Melanie Musson, a finance expert with Quote.com, an insurer comparison tool. “Generally, if the interest rates are more than a point lower than where you locked in, it’s worth considering a refinance.”
Even a 0.5% reduction in rates can make refinancing worth it and help you save thousands of dollars annually. According to CBS News, anyone with a mortgage rate of over 7% can benefit from rate reductions and save thousands, even after the refinancing costs are factored in.
You’ll Have More Options If You’re Looking to Purchase a Home or Vehicle
Motola noted that mortgage rates move more closely with 10-year treasury rates, but federal interest rates influence them. This means that if you’re in the market for a significant purchase like a new home or a vehicle, you may have options opening up in the near future.
More Jobs Could Become Available As Business Spending Increases
Fed rate cuts incentivize small business owners to take more opportunities at lower risk. As the expense of borrowing money drops, businesses may be enticed to increase spending and hire more staff to anticipate higher consumer demands. You could end up finding a new job, or you may even get that raise that was put on hold over the last year or so.
“Ideally, when businesses have lower borrowing costs, they’re also more likely to expand their payrolls, which can help those looking for work or interested in changing jobs,” said Motola.
Musson noted that lower interest rates might also encourage people to take out loans and lines of credit, potentially boosting the overall economy. This economic boost could impact aspects of your daily life. As small businesses grow, jobs become more secure and new opportunities arise.
You Can Boost Your Credit Score
A lower interest rate means that your debt will accrue with less interest, allowing you to make a larger dent in it with your monthly payments. You can then improve your credit score by making your payments on time and keeping your balances low. As your credit score improves, you can obtain better rates on loans, which would help you save money on a future car loan or home mortgage. Your net gain could be thousands in the course of your lifetime spending and saving, all because you made some smart financial moves while rates are more favorable.
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This article originally appeared on GOBankingRates.com: 5 Ways Fewer Jobs for Everyone Else Might Help Your Finances
