Photo of couple evaluating the impact of interest rate changes.

What should you do when interest rates go up or down?

79% of Americans have a credit card.1 44% of consumers have a mortgage.2 43 million Americans have a student loan.3

From car loans to home equity lines of credit, interest rates affect most Americans’ daily financial lives in some form or fashion. Those rates change from time to time, impacting how much interest you pay on loans or credit card rates, and how much interest you earn from savings accounts or growth in investment portfolios.

You’ll probably have to use credit or a loan at some point in your life. You can’t control changes to interest rates. What can you do to minimize the negative (and improve the positive) impact on your financial well-being as interest rates change?

Interest rates change when the prime rate changes.

Illustration showing three things you can do when intestest rates go up: one pay down or pay off credit card debt, two check retirement accounts are balanced and three delay car purchases.

Illustration showing three things you can do when intestest rates go up: one pay down or pay off credit card debt, two check retirement accounts are balanced and three delay car purchases.

First, a quick overview on how and why interest rates change.

The Federal Reserve (Fed) sets—and adjusts—the federal funds rate. That’s the rate that banks charge each other to borrow money for short amounts of time, usually overnight. The Fed raises the rate when the United States economy is doing well to help prevent it from growing too fast and causing high inflation. It lowers it to encourage growth.

You feel the pull of the federal funds rate because it influences the prime rate, which banks charge or give their customers on loans or savings.

Bottom line: A rate increase or decrease is neither good nor bad. It’s more like an indication of the overall U.S. economy. Instead of panicking when it changes, focus on fulfilling your long-term saving and debt payoff goals one at a time.



If you have a variable rate loan or line of credit, interest rate changes will affect you.

Variable interest rate loans can hold the most uncertainty for you; in the event of rising interest rates, your payments can jump, too. A credit card balance or some types of student loans are subject to a variable interest rate, or one that’s tied to a benchmark and can change with interest rates. Adjustable-rate mortgages, a lesser-used tool than in the past, are another example of a loan with an interest rate that changes.

Illustration stating 18.24% is the average interest rate on new credit card offers.

Bottom line: Pay off variable interest rate debt as soon as possible. If you can, refinance loans such as adjustable-rate mortgages to lock in a set (hopefully lower) rate.

If you have a fixed rate loan, interest rate changes won’t affect you.

If you obtained a loan during a period of low interest rates and can easily make your monthly payments (and maybe pay off a little extra, too), there’s not much more you can do to positively affect your financial picture. The opposite is also true: If you borrowed when rates were higher, your payments will be higher.

Bottom line: Consider refinancing higher interest rate loans to help lower your monthly payments. In addition, you may be able to roll a higher-rate loan together with a lower-rate loan if you’re refinancing so you have just one payment. Bonus: If you refinance, consider putting the difference between payments toward the principal loan balance to pay it off more quickly.

Interest rate changes affect car loan rates.

Longer-term interest rates such as fixed-rate mortgages are less affected by changes to the federal funds rate and more affected by the overall U.S. economy. Car loans are a different story; higher interest rates may make the car you want less affordable.

“One of the main places that people will feel the effects of the Fed changing interest rates is in car loans,” says Stanley Poorman, a financial professional with Principal®. “Most people need a car, but can’t pay cash to buy one, so they take out a loan. And since car loans are typically for five years or less, they’re influenced by the prime rate.”

However, low interest rates aren’t necessarily an invitation to take on a big purchase (and its debt) and end up overextending yourself. “A low interest rate can make a large purchase look more affordable than it actually is,” Poorman says. “So consider more than interest rates when making financial decisions.”

Bottom line: Even if interest rates are low, a less-expensive car can help you keep monthly payments lower. Or a shorter-term loan can lessen the length of time you’ll pay interest.

Interest rate changes have a mixed effect on investment accounts.

Interest rate changes can affect performance of your investment options over time, particularly when it comes to the trickle-down effect. For example, if the economy is overheating, the Fed may want to slow growth (and help minimize inflation). Less growth may mean reduced earnings for some companies, which may impact investments. That’s why many investment funds include stocks from diverse companies and business types to balance the overall risk.

Bottom line: Rebalancing your investment options regularly—at least annually or as significant life events occur—may help keep them in line with your long-term goals.

Interest rate changes make a minimal impact on savings account rates.

When interest rates increase, it may mean your savings can earn more money. However, the effects will probably be minimal.

Bottom line: Traditional savings accounts have had low interest rates for some time. Research fees and minimum balances so you can earn as much as you can on your accounts. Bankrate.com keeps tabs on current savings account rates.

Next steps

1 https://www.creditcards.com/credit-card-news/ownership-statistics/

2 https://www.experian.com/blogs/ask-experian/how-much-americans-owe-on-their-mortgages-in-every-state/

3 https://www.nerdwallet.com/article/loans/student-loans/how-many-americans-have-student-loan-debt#:~:text=About%2042.9%20million%20Americans%20have,an%20analysis%20of%20census%20data

4 https://wallethub.com/edu/cc/credit-card-landscape-report/24927#interest-rates

Bankrate link provided as a courtesy.  Principal® does not endorse this site or its use. 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.