If you have a variable-rate credit card, you may have already seen your rates fall in the last couple of weeks. According to KRIS-TV in Corpus Christi TX, the average interest rate on variable-rate cards has fallen to 13% in late January, from 14% in late September. The full positive effect from the Fed rate cuts may take a few months to be reflected in your variable rate. According to Jessica Austin of CardRatings.com, about 90% of all cards issued today have variable rates that typically move up and down in response to the Prime Rate. According to CardRatings, over the coming weeks and months, interest rates will fall .50% on variable rate credit cards.

In a huge attempt to keep financial markets from collapsing, the Fed cut their overnight rate by 75 basis points, or three quarters of a percent. Given that a large rate cut has been 50 basis points since the Greenspan era of measured cuts, and this came between meetings, this can only be seen as drastic action on the part of the Fed.

While we're happy to see the Fed take action to keep the economy afloat, and we all love watching our HELOC and credit card rates drop (those that are tied to the Prime Rate), I am concerned that the Fed is cutting rates drastically when inflation is showing an uptick. The expectation of inflation can cause more inflation, so I'm concerned that if inflation gets out of control, we'll see dramatic increases in the rates later.

Use these lower rates to pay off your debts faster, not spend more money. The Fed's goal may be to get people to spend more, but if rates go up, you'll be in for a world of hurt if you took on a lot more debt during the low rate period.

Despite a strong GDP report showing the economy has been doing well, the Fed cut interest rates another quarter point today to 4.5%, which should lower the Prime Rate to 7.5% as the new numbers come out today and tomorrow. This will lower HELOCs, variable rate credit cards, and other loans tied to the prime rate. Mortgages set to reset against the Prime Rate should be lower.

If you have a subprime mortgage set to reset, please review your loan documentation. If you have a teaser rate, which many are, even lower interest rates won't help. With a traditional ARM, they reset to the current rate from time to time, which isn't usually too severe. However, with teaser rates, you might have gotten a 2 year Rate of 6.25% (then Prime - 2%), but have a standard rate (power reset) of Prime + 5% which means that even with the Prime cut to 7.5%, you'll face a reset of 12.5%!

These teaser loans were modeled as loans that would be refinanced or provide a huge premium for the risk, assuming the sub-prime borrowers would manage for two years even if they were risky. Call your mortgage servicing company now if you have a teaser rate, and see if they will convert it to a fixed rate. Many are doing just that to avoid major defaults.

Good luck, but if you don't get screwed on your mortgage and housing costs, a growing economy and lower interest rates should help us borrowers!

Market watchers are predicting another 25 or possibly 50 basis point cut when the Fed meets tomorrow. For those of us with loans tied to the Prime Rate, including most HELOCs and some adjustable rate mortgages, as well as almost all variable rate credit cards, we will see our borrowing costs dropped. Those with savings accounts or money market accounts will see their returns drop.

However, with the holiday season upon us, the rate cut is likely too late to preserve the Christmas Shopping season. While lower rates are nice, since consumer debts like credit cards are prime plus a large spread, a rate cut of 25 or 50 basis points is likely to only save the typical credit card consumer a few dollars each month. While business loans and home equity loans that are Prime plus a spread of between -1% and 3% will seem more noticeable.

Because rate cuts take a while to percolate down through to credit cards (lags of 30 - 90 days are common), it is unlikely that this cut will help consumers out tremendously in time for the Holiday season that begins the end of next month. However, every little bit helps.

The Fed is looking to revamp the rules for credit card disclosures under the Truth in Lending Act. This is the first major overhaul for the Act since 1981. The proposed changes refine the Act's Regulation Z, requiring creditors to give consumers 45 days rather than 15 days notice before changing interest rates, fees or other account terms. It may also prohibit creditors from calling interest rates "fixed" unless such interest rate is fixed for a specific time period disclosed to the consumer. To learn more about these regulatory changes click here to read the article on SeattlePi.com.

The Fed works on Monetary Policy, basically how banks control the Money Supply.  By shifting interest rates to cause more money to be borrowed, and less held in savings accounts, they encourage a faster usage of money as it moves from less liquid portions of the money supply (savings) to cash that circulates.  The importance of the Money Supply came into modern economic understanding when Milton Friedman's research slowly demonstrated an alternative to the Demand Side Keynesian school of thought that dominated economic theories from the New Deal until the 1970s, when the Supply Side monetary policy came to dominate.

Pimco's Bond Expert, Bill Gross, considered the nation's leading Bond Trader, is concerned that the Fed doesn't fully understand how the growth of private security and derivative based financing changes the importance of the reserve based system controlled by the Fed.  In this view, reserve based banking, where deposits are loaned back out with only a small portion held as banking reserves, is less significant than the modern financial instruments, and the tightening of the credit market is more severe.  In this outlook, the 7-fold velocity of money in the banking system is trumped by the 10-fold to 20-fold private credit markets, and if the credit markets continue to disappear, the Fed will have to do more to compensate or risk a massive economic contraction.

Globalization, a popular boogeyman for economic woes, also has had a dramatic effect on the economy.  The US economy has historically had a low level of trade compared to other nations, simply because the US economy is so large that the Net Exports (normally negative in the US because of the trade deficit) wasn't a such critical factor in GDP.  However, in a globalized economy, every transaction becomes subject to competition, effecting inflation and other parts of the economy.

Perhaps Monetary Policy explains the 20th Century and the "Great Moderation" that the Fed Chief talks about, as the economy matured and stabilized, volatility dropped, recessions became less severe, depressions nearly non-existent.  As stocks became seen as "less risky" in the long run, the Price-Earnings Ratio expanded as the risk premium lowered, and massive wealth was created.  However, in time, the finance system has become more complex, and the ability for the Fed to influence it has lowered, making this credit crunch a very dangerous development.

The US Dollar hit an all-time low against the Euro, falling even further after the Fed rate cut and with an anticipated rate cut at the end of October.  Lower interest rates cause investors to move money to countries with higher interest rates, causing them to sell dollars and buy other currencies, like Euros.  If you purchase goods made in Europe, look to trim the budget elsewhere, as a weaker dollar should cause prices of imported products to rise.

Fed Rate Cut and your Credit

Taking the fed funds rate to 4.75% will have a direct impact on consumer debt linked to the prime rate. This type of debt includes home equity loans, lines of credit, and some credit cards. Since banks are likely to cut the prime rate by the same half a percentage point the Fed gave up yesterday, lines of credit with floating interest rates will benefit. To find out if your credit card has a variable rate of interest, read the terms and conditions on your credit card statement. If the rate of interest is tied to the prime rate, i.e. if the terms and conditions talk about the prime rate plus 10 points, then your rate may have just dropped from 18.25% to 17.5%. To learn more about interest rates and credit cards see our article, Interest Rate Basics. If you are a home owner with a mortgage, this morning's article on Jim Cramer's TheStreet.com may be of interest to you. It seems the Fed cut may not affect you positively unless you are in a position to jump to a fixed rate mortgage now, and now may be too late. Learn how mortgages rates are actually pegged to 10-year Treasury yields. Long-term Treasury yields have already came down since investors were already spooked by the mortgage crisis and moved money to government bonds. So if you didn't refinance to a fixed-rate loan earlier this month, when rates fell in anticipation of the Fed's move, then the game may already be over and your rates may rise despite the Fed. See the article by Personal Finance Editor, Allison Bisbey Colter, The Fed's Cut Won't Save Struggling Homeowners on TheStreet.com.