Practical pointers for your money when interest rates go up or down

Interest rates affect a lot of people in a lot of different ways. For example: 81% of Americans have a credit card. About 60% of homeowners have a mortgage. Approximately 44 million people in the U.S. have student loan debt. Those interest rates may change from time to time, impacting the interest you pay on those loans or credit cards, or the interest you earn on savings accounts and investment portfolios. 

But, a rate increase or decrease is neither all good nor all bad. Whatever interest rates do, you have your own financial goals, including long-term saving and debt payoff, to focus on, one at a time. Here’s how to minimize the negative (and improve the positive) impact of interest rate changes.

First, a quick overview of how and why interest rates change. The simplest answer is because of the Federal Reserve, or Fed. In a nutshell, the Fed monitors economic conditions and uses what’s called the federal funds rate to slow down growth and inflation or to spur economic activity. The federal funds rate influences the prime rate, which is the rate banks use to set interest on loans, credit cards, and sometimes savings. That’s the rate that trickles down to you.

For high-interest or variable rate loans or debt: Many credit cards, home equity lines of credit, some types of student loans, and adjustable-rate mortgages become more expensive as rates rise. By working on paying down your balance on these loans or debt, you can reduce overall interest, too. One idea is to pay extra, if possible, on the highest-interest balances, while making minimum payments on other debts. Or, if available, transfer your balance to a lower or fixed-interest option. 

For fixed-interest loans or debt: Even if interest rates go up or down, payments on those loans don’t change. However, if you have an older debt with an interest rate that’s even higher than current rates, refinancing may make sense—especially if rates are expected to continue to go up. To compare the difference between your current rate and new rates as well as closing costs or fees with refinancing and length of time for debt payoff, search for a free refinancing calculator online. 

For investments or savings: Rising rates affect different investments in different ways. Some assets may increase in value, while others may decline. That’s one reason financial professionals may suggest diversification, with investments that overall include assets from a range companies and business types to balance overall risk. Rebalancing can also help; it re-sets your asset allocation back to align with your financial goals, timeline, and risk tolerance.

For high-interest or variable loans or debt: You may have a couple of ways to lower interest rates or even shift to fixed interest rates. If you have a high-interest credit card, see if you can shift its balance to a lower-interest option, or even if you qualify for a lower interest loan to pay off the debt. Or, you may think about consolidation, which combines several different loans or debt sources into one balance, with a single payment date and interest rate. 

For consolidation to be effective, the new, lower rate should be meaningfully lower than what you’re currently paying. (Try a free debt consolidation calculator to compare current and future payments.) And, map out a clear payoff plan that avoids adding new debt after you consolidate. 

For fixed-interest loans or debt: Declining interest rates are a good chance for you to refinance fixed, but high, interest debt. It may help lower your monthly payments, reduce total interest paid, or even trim the total loan length. And, if you’re able to free up extra funds from reduced payments, you may be able to save for other goals, such as paying down other debt faster or saving more for retirement. A free online refinancing calculator can help you compare options. 

For investments or savings: When interest rates go down, the interest rates on traditional savings accounts goes down, too. (That includes even high-yield options.) If you have enough in your emergency savings fund, you may consider switching additional deposits to another savings goal, such as increasing retirement contributions, that’s not tied solely to current interest rates.

Ignore short-term rate moves. Trying to time the market rarely works. 

Focus on your long-term plans. Financial goals, both short- and long-term, may include saving for a mortgage, increasing retirement savings, boosting an emergency fund—all not solely dependent on interest rates. 

Check in with and understand your debt. Some balances may be affected by interest rate changes; some may not. Fixed interest rates provide a guaranteed payment amount, while adjustable-rate interest rate debt may change what you owe.