How the Fed Rate Affects Your Money

The Federal Reserve cut the target federal funds rate at its December 2024 meeting by a quarter percentage point. The rate range is now 4.25% to 4.50%.

This is the third time that the Fed has cut the target rate in 2024. Previous cuts were in September and November.

How and why does the federal funds rate affect me?

The federal funds rate doesn’t directly change the interest rates you receive on loans or bank accounts, but it does tend to affect them.

Generally, as rates rise, you will pay more in interest on loans but receive more interest on your savings. On the flip side, as rates drop, you will pay less in interest on loans but also receive less interest on your savings.

The Fed raises rates, which makes it more expensive for consumers and businesses to borrow money, when it wants to decrease economic demand and restore price stability.

The Fed cuts rates, which makes it more affordable for consumers and businesses to borrow money, when it wants to stimulate the economy and inflation is less of a concern.

What to do if interest rates change

The Fed meets and makes a decision on rates eight times a year. Here’s what to do if they raise or lower the federal funds rate at one of their meetings.

When interest rates go down

When the Fed cuts rates like it did this month, here are some best practices to follow:

Compare refinance rates
If you borrowed when rates were at their peak, now could be a good time to refinance your mortgage, refinance your auto loan or refinance your personal loan. This is especially true if you’ve also improved your credit score since you took out your original loan. (Check your credit score and receive credit alerts for free with LendingTree Spring.)

You might be tempted to wait for further rate cuts, but refinancing earlier might end up saving you thousands of dollars in interest in the meantime.

“The good news is that you can save money when rates fall on personal loans, home equity loans, auto loans and other types of loans.”
— Matt Schulz, chief credit analyst at LendingTree

Consider making that big purchase
Between high rates and high home costs, many would-be homebuyers have felt locked out of the market. Houses are still more expensive than they were pre-pandemic. That’s unlikely to change in the near future. The same is true for cars. But taking advantage of reduced interest rates could help you offset those increased costs.

Simply put, there really isn’t a “perfect” time to buy. But if you’ve been holding off on a major purchase, making it after a rate decrease could be your best bet. If rates drop even more in the future, consider refinancing.

See if consolidating your credit card debt will save you money
Credit cards have variable rates, which means they go up and down as the market fluctuates. Compare debt consolidation loans to see if you qualify for a lower rate than what you’re carrying across your cards.

And economic conditions aside, borrowers with excellent credit (740+) typically see lower rates on debt consolidation loans than credit cards.

When interest rates go up

Although the Fed just cut rates, and experts predict more rate cuts may be on the way, it’s still important to prepare for potential rate hikes in the future. Here’s what to do if that happens:

Pay down your credit cards
When rates go up, your credit card interest rate may take a month or two before it goes up too. If you have credit card debt, this means your monthly payments would grow and you’d be paying more in interest — costing you a lot more money.

If you currently have credit card debt and rates are expected to go up, consider making bigger and more frequent payments to pay it off more aggressively. Signing up for a 0% interest balance transfer credit card or card with an intro 0% annual percentage rate (APR) offer can shield you from fluctuating interest rates too.

Lock in your mortgage rate
If you already have a fixed-rate mortgage, don’t worry — your interest rate will always stay the same, no matter what the Fed does.

But after a rate hike, rates on a new mortgage could trend up. Rates on products like home equity lines of credit (HELOCs) and adjustable-rate mortgages (ARMs), which are pegged to the prime rate, will also increase if rates do.

Set your auto loan rate
Like mortgage rates, auto loan rates can go up alongside Fed rate hikes. Refinancing terms also become less favorable in an environment of rising rates. If you think rates will go up, locking in a lower rate by buying your car now may help you spend less money on interest.

If you’re planning on buying a car, pay attention to the APR and move fast if you want today’s rates. If rates increase down the line, the interest rates on new auto loans could rise as well.

Grow your savings
There’s some good news when it comes to the Fed raising interest rates: savings accounts tend to earn more interest.

Shop around for the best rates, because not all banks will pay you more. Look for a high-yield savings account, compare annual percentage yields (APYs) and choose the bank with the most attractive offer. The higher the APY, the more interest you’ll earn. You may need to move your money from one bank to another, but the hassle could be worth it.