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Wallet on purple background
Wallet on purple background

Published February 19, 2016.
Updated July 31, 2019.

How Federal Reserve rate changes affect your wallet.

For a decade, the Federal Reserve raised the federal funds; then on July 31, 2019, it lowered it again. Here's how those changes may affect your financial life.

Primed for change.

When the Federal Reserve changes the federal funds rate, it affects how much banks and credit unions pay to borrow money.

“Overall, the fed sets short-term rates that banks borrow,” explains Lindsey Myhre, chief financial officer at STCU. “The market determines long-term rates like the 10-year Treasury rate, which typically sets mortgage rates.”

The prime rate – often considered the lowest rate given to commercial borrowers – is frequently a benchmark in setting home equity lines of credit and savings. Some institutions charge 3 percentage points above the federal funds rate for lines of credit, and when the prime rate changes, it is passed on as a change to consumer loan and savings rates.

Rising rates can impact your credit cards.

Variable-rate credit cards tend to change quickly when interest rates go up or down. Check your credit card terms and conditions to see if your card has a fixed or variable rate.

If your variable interest rate is based on the prime rate, it may change with little to no warning. If your card has a fixed interest rate, and you’re currently making your monthly payments on time, then you will receive notice from the card issuer if your rate changes.

Either way, this is an excellent time to start paying down your credit card balance. Or consider transferring your card balance to another card at a lower interest rate. That would help you to pay down the principal of your credit card debt, rather than just making payments on the interest.

"The market determines long-term rates like the 10-year Treasury rate, which typically sets mortgage rates."

And your loans.

Like credit cards, changing rates will affect loans if the interest rate is variable. Fixed-rate loans should not be affected by rising rates, but if your loan is variable, such as an adjustable-rate mortgage or revolving line of credit, then you should determine how the interest rate changes are calculated on your loan and plan accordingly. If you still have years to pay off your loan, then it may make sense to refinance the loan with a fixed rate.

If you don’t currently have loans, but are thinking about making a big purchase soon, then you should carefully research what that loan will cost. Small changes in interest can affect the payment and your ability to repay a loan. For example, if you borrowed $300,000 to buy a house at 4 percent annual percentage rate (APR) and a 30-year mortgage, it would require a monthly payment of $1,400. But a 6 percent APR loan on that same home loan would cost you $1,800 each month, just because of the higher cost of money.

Fed rates can create greater savings.

Savings account rates at most financial institutions tend to respond to rate adjustments by the Fed, but at a slower pace than credit cards and loans. That’s because banks and credit unions will cautiously wait to ensure they have an adequate net interest margin between what they can charge for loans (interest earned) and what they must pay depositors on their savings (dividends paid).

For short-term savers, this means interest rates are not likely to change significantly in the near future. But if you’re saving for the long term, then a rise in interest rates could boost your savings dividends. Conversely, an expected cut in rates means you might want to lock in a higher savings rate before the change.

The bottom line.

Living in an economy with rising interest rates means that borrowing money is probably going to get more expensive, but saving money is likely to pay back more. If changes are occurring frequently, you might consider "laddering" your certificate investments to smooth out the ups and downs. Read more at our certificates page.

No matter what the rates, the basics of good financial health — budgeting carefully, paying off or reducing your cost of your debt, tucking a few extra dollars into savings, and planning ahead – all remain the same.