Table of Contents
Key takeaways
Even though the Federal Reserve hasn’t touched interest rates since July, consumers are still feeling the impact of higher interest rates, with mortgage rates, auto loans and home equity lines of credit (HELOC) holding at the highest levels in more than a decade.
Savers are benefiting from the current high-rate environment, as they can easily earn 5 percent or more in interest on their cash if they shop around.
Borrowing costs and savings yields are already edging lower as it looks like that the Fed will cut interest rates this year, underscoring the importance of shopping around for the best rates.
In this article
1. Get a snapshot of your personal finances
2. Know what’s good debt and bad debt — and eliminate the latter
3. Shop around for the most competitive borrowing rates
4. Work on boosting your credit score
5. Keep up frequent communication with your credit card issuers
6. Don’t let inflation keep you from saving
7. Look around for the best savings yields
8. Consider locking in a longer-term CD
9. Start recession-proofing your finances
10. Think about your career and income opportunities
11. Tune out market volatility if you’re investing for the long term
The Federal Reserve looks like it might be done raising interest rates, but the days of rock-bottom borrowing costs are still long over — and consumers are facing money dilemmas they haven’t had to debate for years.
The Fed’s latest decision means the Fed’s key benchmark borrowing rate will stay in its current target range of 5.25-5.5 percent, the highest level since 2001.
After topping 8 percent for the first time since 2000, mortgage rates have retreated from those highs to just below 7 percent, the latest data from Bankrate shows. Yet, before the Fed began raising interest rates in the post-pandemic era, it’s a level that would-be homebuyers haven’t seen since 2009. Even forms of consumer credit once seen as low-cost debt — such as home equity lines of credit — are now hitting the highest level in over a decade.
There are also some bright spots to paying more for money this year. For starters, savers can earn 5 percent or more on their cash if they shop around, Bankrate data shows. It’s also now easy to find a yield that eclipses inflation if you keep your cash in a high-yield savings account, meaning your money isn’t losing purchasing power just by sitting on the sidelines.
But the ultimate question is when the Fed will start to begin to cut interest rates. Fed officials might not be in a rush to cut interest rates, even as inflation slows, out of fear that price pressures may accelerate. Yet, interest rates — and savings yields — are already starting to drift lower, now that lower rates in 2024 appear to be a possibility.
— Greg McBride, CFA | Bankrate chief financial analyst
Here’s your 11-step plan for taking charge of your wallet after the Fed’s latest rate decision.
1. Get a snapshot of your personal finances
In today’s high-rate era, consumers should get an idea of where they are with their personal finances, including how much debt and savings they have.
Print out statements from any account housing liquid cash — or money you could withdraw without penalty. Those are most likely savings accounts, but they could also be funds in a money market account or no-penalty CD. Even better, note each account’s annual percentage yield (APY).
Next, list your debt, including your outstanding balance and the annual percentage rate (APR) you’re charged. Keep tabs on whether that debt has a fixed or variable rate, and note how much interest you pay per month.
Then, keep track of the income and expenses flowing in and out of your budget each month.
The goal of taking a hard look at your personal finances is to hopefully inform you of how fragile you might be in a rising rate environment. You might also be able to identify easy budget cuts or debt to eliminate. Individuals who live outside of their means and borrow to fund their expenses will feel squeezed in a rising-rate environment.
2. Know what’s good debt and bad debt — and eliminate the latter
Consumers with variable-rate and high-interest debt should take careful note. Those borrowers are hit hardest in a high-rate environment, and 11 rate hikes over a 20-month period have brought punch after punch.
“Anything you can do to pay off your balances faster and make adjustments in your budget, so you don’t have to rely on your lines of credit and carry debt from month to month, that’s the best strategy,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
High-interest debt commonly comes from a credit card. Even when the Fed’s rate held near zero, the average credit card rate hovered slightly higher than 16 percent, according to Bankrate data. If you don’t pay off your balance in full each billing cycle, that’s likely costing you hundreds — if not thousands — of extra dollars a month.
Consider consolidating your outstanding balance with a balance-transfer card to help chip away at your high-cost debt, and shop around for the best offer on the market. Most cards start borrowers with a rate as low as zero percent for a specified number of months before transitioning to the regular APR. The economy’s current prospects of avoiding a recession are also good for borrowers with credit card debt: Issuers are less inclined to take their consolidation offers off the market.
Meanwhile, one benefit to tracking how much you pay in interest each month is, it can also help you determine whether you’d save money by transferring your debt — a process that comes with fees.
As rates rise, consumers would be wise to eliminate any variable-rate debts by refinancing into a fixed rate. If your credit score has improved in recent months, you might also be able to find a better rate on the market than the one you’re currently paying.
“You don’t want to be a sitting duck for higher interest rates on your credit card or home equity line of credit,” Bankrate’s McBride says. “Fixed-rate debts like mortgages and car loans that are low and mid-to-single-digit rates — there’s not a whole lot of incentive to pay ahead.”
That’s because the relatively low-cost debt can be a strong hedge against inflation. Simply put, you might be better off putting that money toward other avenues that meet your financial goals — such as saving or investing — than paying it off.
3. Shop around for the most competitive borrowing rates
Shopping around will be one of the most important steps a consumer can take in a high-rate environment.
In addition to climbing mortgage rates, home equity loans and credit cards, car loan rates have surged to the highest level since the Great Recession.
The new landscape signals an end to the record-low rates of the coronavirus pandemic-era — and even the lower rates borrowers were accustomed to in the decade after the financial crisis. Yet, some lenders might be more inclined to offer better deals than others to lure new customers in a slower market. Financial experts typically recommend comparing offers from at least three lenders before locking in a loan.
Another avenue where noting rates might be prudent: private student loan borrowers. Doing the same kind of comparison shopping might help you score the lowest rate possible — lowering your monthly payment and helping you get out of debt quicker.
Federal student loan borrowers, however, will want to think twice about refinancing their debt into a private loan. Doing so could mean giving up on important perks, such as hardship or unemployment forbearance, income-driven repayment plans and other major programs for federal student loan borrowers. Federal student loans also now mostly come with fixed rates.
4. Work on boosting your credit score
If there’s any factor that inhibits consumers’ ability to borrow cheaply more than the Fed, it’s their personal credit scores. Most of the time, financial companies save the best rate for the so-called “safest” borrowers: those with good-to-excellent credit scores and a reliable credit profile.
Companies may even grow pickier about who they approve for loans. Rejection rates have been hovering at the highest levels in five years since July, New York Fed data shows. Rejection rates were highest for individuals with credit scores below 680.
In new data released in November, rejection rates continued to climb for credit cards and mortgage refinance applications, though they edged lower for mortgages. Meanwhile, the average rejection rate for auto loans even hit the highest rate since the start of the series in 2013, according to the report.
Improving your credit score could help you save throughout all aspects of your borrowing life, including on auto loans and mortgages.
To have the best credit score possible, concentrate on making all of your debt payments on time and keeping your credit utilization ratio as low as possible — the two factors with the biggest influence on how your rating is calculated.
5. Keep up frequent communication with your credit card issuers
Issuers might be inclined to give you a new APR if your credit score improves, NFCC’s McClary says. If they don’t, you’ll at least know it’s time to shop around or take advantage of a balance-transfer card.
It leads to another crucial step in your financial plan: opening up the channels of communication with your credit card issuer.
“It’s sad how few people talk to their creditors when times are good because it’s when you have those conversations, you realize a lot of really great things you could be doing to save even more money,” he says.
When the Fed has been tightening rates, it’s worth reviewing your cardholder agreement and making sure you know how your issuer calculates your APR.
Typically, rates on variable loans change within one to two billing cycles after a Fed rate hike — meaning some borrowers may still see their rates edge up as lenders catch up to the Fed’s 11 other rate increases. Yet, any rate increase is up to the creditor, meaning it’s not outside your issuer’s purview to hold off until the Fed raises rates.
Credit card companies, by law, have to give cardholders a 45-day notice if they’re going to increase their cardholder’s interest rate.
“Credit card companies do have some latitude in deciding when and how much to increase a cardholder’s interest rates within the confines and constraints of the Card Act,” McClary says. “It’s in those areas that the details are going to be in the cardholder agreement.”
6. Don’t let inflation keep you from saving
Elevated inflation might make consumers hesitant to sit on large piles of cash out of fear that their money could lose some of its purchasing power, but experts say it’s more important now than ever given recession risks and economic uncertainty.
It’s also easier than you may think to now find a savings rate that beats those price pressures. All 10 banks ranked for Bankrate’s best high-yield savings accounts in January offer yields higher than headline inflation.
A crucial part of any financial plan is having cash for emergencies. Experts typically recommend storing six months’ worth of expenses in a liquid and accessible account. But even if you can’t afford to stash that much away, any little bit can help protect you from accruing high-cost credit card debt when an unexpected expense pops up.
“Building a rainy day fund is really important, even if the interest rate you’re earning on those funds is lower than the inflation rate,” says Mike Schenk, deputy chief advocacy officer at the Credit Union National Association. “Put a little bit into a savings account over time, and before you know it, you’ll have a chunk of savings that can give you a better night’s sleep at the very least.”
7. Look around for the best savings yields
Be prepared to shop regularly for the best savings yields on the market, even if it means moving your funds to a different bank to capitalize on a better return.
Typically, online banks can reward their depositors with higher yields because they don’t have to pay the overhead associated with operating a brick-and-mortar financial institution.
The 10 best high-yield online banks ranked for January 2023 are currently offering an average yield of 5.1 percent, almost nine times the national average and 400-500 times higher than yields at Chase and Bank of America. Those banks offer yields as high as 5.35 percent and as low as 4.75 percent.
You shouldn’t sacrifice liquidity or FDIC insurance for yield chasing, especially if you’re keeping your emergency fund in that savings account. But if an account on the market offers terms that fit your financial needs, you may want to consider switching accounts.
“Every month, a different bank is going to have the best rate,” says Gary Zimmerman, CEO of MaxMyInterest. “Since an FDIC-insured savings account is a commodity, it doesn’t really matter which bank. The whole idea of, ‘I’m going to pick a bank,’ that doesn’t make any sense.”
8. If you already have an emergency fund, now’s the time to lock in a long-term CD
Savings yields fluctuate, and banks often don’t wait for a rate hike or rate cut to adjust how much they’re paying depositors in interest. Even the mere expectation of the Fed reducing rates in the near-future can send yields tumbling.
One way to make sure you can take advantage of higher rates for a longer time horizon? Consider locking in a longer-term CD, particularly one with a 2-year or 5-year maturity.
The highest-yield 2-year CDs are offering consumers an APY as high as 5.51 percent, and the top 5-year CDs are offering 4.60 percent. Both have already edged lower, peaking at 5.75 percent and 4.85 percent, respectively.
If you don’t mind locking away your cash for the entire length of the CD, it might be a strong — and safe — way to add some yield to your portfolio of investments, including for retirees.
“With rates still rising and inflation now declining, it is the best of both worlds for savers,” McBride says. “Consider locking in longer-term CDs, which are peaking now.”
9. Start recession-proofing your finances
The odds of the Fed slowing inflation without causing a recession are growing, but it’s still wise to prepare for the unexpected. Monetary policy will keep putting the brakes on the economy as long as borrowing costs stay high — and that force could grow as inflation keeps slowing.
“Raising interest rates is putting the brakes on the economy,” McBride says. “The harder they press the brakes, the sharper it’s going to slow down. The cumulative impact of ongoing rate hikes is where you’re likely to see a slowdown in economic activity and the labor market.”
Recessions aren’t always as severe as the coronavirus pandemic, the Great Recession or even the Great Depression almost a century ago. They do, however, mean increased joblessness, reduced hiring job security, as well as market volatility.
That means it’s important to start thinking about how you’d stay afloat in a recession. No matter how strong the U.S. economy is, it’s always important to live within your means, chip away at your debts and make sure you can cover a period of joblessness.
10. Think about your career and income opportunities
When the cost of living rises or the economic outlook seems shaky, one of the best investments you can make is in yourself. Think about ways to increase your earnings opportunities over your lifetime, whether by getting more training, education or increasing your skills. Joblessness is typically lower for those with a bachelor’s degree or higher — even during recessions, according to data from the Labor Department.
“You have to be looking down the road because what’s far more impactful to household finances than an increase in interest rates is a job loss or a significant decline in wealth,” McBride says. “Those are the types of things that happen in a recession.”
11. Tune out market volatility if you’re investing for the long term
High rates typically cause market dysfunction. That’s partially by design: More expensive borrowing costs tighten financial conditions, soaking up extra liquidity in the marketplace. Case in point: Last year, the S&P 500 plunged 20 percent, the worst year for the major stock index since 2008.
Markets haven’t been as jittery so far this year. The S&P 500 has rose to new record highs and is up 20 percent since the end of October alone.
Markets have been looking past higher rates for most of 2023, since inflation has been slowing without a material dent in the job market or economy.
Markets, however, could still get volatile, especially if the Fed doesn’t cut interest rates as much as investors currently expect. But the volatility shouldn’t mean anything for long-term investors, especially those who put money into the markets through a retirement account. If you’re investing over a time horizon that spans decades, you’ll no doubt have to endure both booms and busts.
Remember: Downdrafts in the market are a powerful buying opportunity. Investing can also help you beat inflation, though it’s something you should think about mostly after you start saving.
“Investing does make sense because you will more than likely have to take a little bit of risk to earn returns that are higher than the inflation,” CUNA’s Schenk says.
Bottom line
The failures of SVB, First Republic and Signature Bank about a year ago also illustrate that something can always break when rates rise — but those cracks will be for nothing if the Fed can’t get control of inflation first.
Defeating rapid price pressures has been the Fed’s ultimate goal with raising interest rates. For U.S. central bankers, however, that might be one of the most difficult jobs yet. Fed officials want to be sure that inflation isn’t just moving to target — but will stay there.
“Inflation is easing, but has further to go to get to the 2 percent level,” McBride says. “Robust consumer demand and continued strength in the labor market could lead to inflation moving back up — or at least not moving lower as consistently as we’ve seen in recent months. The Fed will want some more time to evaluate the progress on inflation before hinting as to when rate cuts may begin.”
