What are variable rates and why do they change?

By Gisele Goes
March 20, 2020

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This page is for informational purposes only. Chime does not provide financial, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.

You worked hard for your money, and we’re committed to making it work for you. 

First things first: When you start saving, it’s important to understand changes to the economic market and interest rates work. That’s why we put together this guide—to help you understand:

  1. How changes in the Federal Reserve’s interest rate policy can impact your financial plan
  2. How we’ll always have your back, even if interest rates and the market fluctuate

Understanding why rates change 

The Federal Reserve is the central bank of the U.S. and its purpose is to maintain safer, more flexible, and more stable monetary and financial system. The Federal Reserve can try to reduce changes to the economy by changing the Effective Federal Funds Rate, or what is sometimes just called the Federal Funds Rate, when it thinks it is necessary to protect the economy. This is a benchmark rate that measures how much interest banks can charge to lend each other money. 

Even though rate changes are out of our control, we’re always looking out for you. If a change to the Federal Funds Rate effects any of the products Chime provides you, we’ll let you know! 

How can a rate change impact loans and savings?

Remember how we said the Federal Funds Rate is a benchmark for how banks lend money to each other? This also helps the Federal Reserve determine how much to charge in interest for loans to individual borrowers. When banks charge less to borrow, they may also lower the amount of interest they pay out, to keep the business balanced.

  • Impact on loans: From a borrowing perspective, a rate cut can actually be helpful. When rates drop, it usually becomes less expensive to borrow money. 

So, if you’re interested in opening a new credit card account or getting a personal loan, you may be able to get a better deal on the rate. A rate cut can also be good news if you’re planning to consolidate or refinance some debt you already have. 

  • Impact on savings: The flip side of the lower interest rate coin is that you may get a little less traction in your savings account. 

When the Federal Reserve cuts the Federal Funds Rate, banks can cut the rates they charge on loans, which sometimes causes them to lower interest rates they offer to savers. As a result, the annual percentage yield (APY) on savings accounts go down. 

Here’s another way to look at it:

  • A 0.10% decrease in annual percentage yield (APY) translates to a difference of just $1 less earned in interest over the course of a year for every $1,000 in savings

What does Chime do to get you the best possible rate?

We work with FDIC-insured Banks to get you the best rate we possibly can. We offer a variable rate savings account, which means the rate may change depending on a few factors, including things like changes in market rates and conditions. We do not take rate changes lightly, so we will always do what we can to provide you with the best rate.

Bottom line

Small or not, interest rate changes can be frustrating. But if, and when the Federal Reserve fluctuates, we always have your back—by making sure you are benefiting from the best rate we can offer, no matter what. It’s part of our mission to try to bring you financial peace of mind. 

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