Fed Funds Rate Cut a Double-Edged Sword

Credit cards

Interest rates on many credit cards are indexed to a bank's prime rate. When the Fed cuts rates, banks typically lower their prime rate, which is about 3 percentage points above the federal funds rate, by the same amount. If your credit card has an adjustable rate, it should go down with the rate cut. To check your interest rate, read the details section of your credit card agreement.

Credit card companies have been hit hard by consumer defaults and the sluggish economy, so many companies may limit the rate drop to less than the entire 50 basis points. If your bill next month doesn't show a drop in your variable rate, consider calling your credit card company to negotiate for a lower rate.

Short-term loans

Car loans and home-equity loans are relatively short-term debts that tend to fluctuate with a lender's prime rate, which, in turn, moves along with the federal funds rate. Although an existing fixed-rate loan won't change with a drop in the federal funds rate, consumers shopping for a new loan stand to benefit from lower interest rates.

How much lower is a question of how worried banks are about their bottom line. The Federal Reserve may free up the cash supply, but banks still choose to pass on as little or as much of the benefits in the form of lower interest rates on loans. Shop around to make sure you get the best rates available, since not every lender will react the same way to the recent rate cut.