If the fed cuts the interest rate, shouldn’t the rates on credit cards, mortgages, car loans etc go down too?

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Since the fed keeps cutting the interest rate, shouldn’t the credit card, mortgage, and car loan companies cut their rates too? How should you request for them to do that? It doesn’t make sense to me that these companies would keep their customers locked in to the current rates, especially if they are on the verge of defaulting.

  1. Reply
    February 18, 2011 at 6:30 am

    No – the Federal Reserve only controls the “Fed Funds Rate” which is the rate that the fed charge banks who borrow funds from other banks (through the Fed) and is a short-term rate. Market Rates – car loans, credit card, mortgages – are based off of other rates (US Prime, US Treasuries, US LIBOR, etc..). As the Fed decreases or increases the Fed Funds Rate, then it is up to capital market supply and demand to move these other rates. In the current ‘credit crisis’, market rates are not behaving as they have in the past, mainly due to banks unwillingness to lend money. If there is no supply and high demand, then the price of the commodity (in this case interest rates) goes up (or does not come down). In addition, banks are reluctant to reduce credit card rates on those cards not tied to a market rate since the spread on this business is so high (i.e. profitable) – why would they want to reduce this – they’d only be reducing their own income?

  2. Reply
    February 18, 2011 at 6:32 am

    They don’t cut rates based probability of default. Rather they do the opposit and try to rake in as much cash as possible from clients/business lines.

  3. Reply
    February 18, 2011 at 6:56 am




    Banks make 3% on the loan.
    The investors who give the banks money for the loan make 3% on the loan.

    Do you think if I had 1 million $ I would only make 3% on it. “NO”

    So the rates will not go down.

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