What to Do (and Avoid) When the Fed Raises Interest Rates

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The Federal Reserve announced its latest interest rate increase at its July meeting after a short pause on rate hikes. At the June meeting, the Federal Open Market Committee (FOMC) voted to maintain the current rate, ending a streak of consecutive increases lasting more than a year. The pause was short-lived, though, as the FOMC increased the federal funds rate to a target range of 5.25%–5.50% at the July meeting.

While the federal funds rate doesn't directly affect consumers, it's used by banks and lenders to inform their decisions, which can affect you. You can take action after rate hikes to protect your finances and take advantage of these changes.

Why the Fed Raises Interest Rates

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When the Fed raises rates, the hikes are meant to combat inflation by decreasing consumer spending and slowing overall demand for products. When discussing rate hikes, the Fed only controls one rate — the federal funds rate, which is the interest rate commercial banks charge each other for overnight lending. The federal funds rate, though, affects the prime rate, the rate individual banks charge you and me. As the federal funds rate increases, typically, so does the prime rate. Banks and lenders use the prime rate to determine rates for various financial products, including loans and credit cards.

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What To Do When the Fed Raises Interest Rates

When the Fed announces a rate hike, it doesn't take long for banks and other financial institutions to follow its lead. Understanding how these rate hikes affect your finances can help you make wise money decisions. Here's a look at what you should do when the Fed raises interest rates.

Pay Down High-Interest Debt

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Few financial products are affected more by rate hikes than credit cards and other lending products with variable interest rates. Credit cards generally have higher APRs than other lending products already. It's always a good time to reduce high-interest debt, but even more so as rates increase.

Carrying a balance on your credit cards each month means getting hit with expensive interest charges, making it even more challenging to pay off. Adjust your budget as much as possible to pay down credit card and other high-interest debt faster.

Consider getting a balance transfer credit card to consolidate your existing card debt. Many balance transfer cards have an introductory 0% APR for extended periods. You must meet credit and other requirements to qualify for a balance transfer card, and they often charge a transfer fee. Depending on your current card's APR, you could save money by taking advantage of an intro APR offer.

Recommended Low-Interest Credit Cards

Credit Card	Intro APR	APR	Learn More
Wells Fargo Active Cash® Card Apply Now Rates & Fees	0% intro APR for 12 months More Info 0% intro APR for 12 months from account opening on purchases and qualifying balance transfers. 19.49%, 24.49%, or 29.49% Variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5.	19.49%, 24.49%, or 29.49% (Variable)	Apply Now Rates & Fees
Chase Freedom Unlimited® Apply Now	0% Intro APR for 15 months More Info This card allows new cardholders to save money with an introductory 0% interest rate on new purchases and balance transfers for the first 15 months of account opening. After the introductory period, a 19.74% - 28.49% variable rate will apply. Balance transfers made within the first 60 days of account membership will be charged a balance transfer fee of either $5 or 3% of the amount of each transfer. After 60 days, that balance transfer fees increases to either $5 or 5% of the amount of each transfer, whichever is greater	19.74% - 28.49% (Variable)	Apply Now
Wells Fargo Reflect® Card Apply Now Rates & Fees	0% intro APR for 21 months More Info 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 17.49%, 23.99% or 29.24% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5.	17.49%, 23.99% or 29.24% (Variable)	Apply Now Rates & Fees
Citi Double Cash® Card Apply Now Rates & Fees	0% for 18 months on Balance Transfers More Info Balance Transfer Only Offer: 0% intro APR on Balance Transfers for 18 months. After that, the variable APR will be 18.49% - 28.49%, based on your creditworthiness.	18.49% - 28.49% (Variable)	Apply Now Rates & Fees

Bump Up Your Savings

Interest rates on lending products often increase after rates hikes, but so do rates on deposit accounts at banks and credit unions. You could see APYs jump on savings accounts, CDs, money market accounts, and other interest-bearing accounts. 

Take advantage of high-yield savings by moving more of your money to savings when rates increase.

Lock in Your Rates

One of the best actions you can take with rate hikes is to shop around for the best rates. A 30-year fixed-rate mortgage is not directly affected by the Fed's rate hike, but that doesn't mean rates won't increase in a high-rate environment. A home equity line of credit (HELOC) and adjustable-rate mortgage will rise after a Fed rate hike. So will private student loans with adjustable rates.

If you're a prospective homebuyer, keep your mortgage preapproval current so you understand your price range at the most current rates. Your lender may offer a mortgage rate lock, which locks in your mortgage rate for a predetermined period.

If you're considering refinancing, now is the time to shop around before rates increase. For federal student loan borrowers, consider the benefits and protections you would be giving up before refinancing your loans. You could lose access to federal loan repayment plans, forbearance, deferment, and loan forgiveness programs. Ensure you're in a good place financially before you refinance your student loans to a lower rate with a private lender.

Boost Your Credit Score

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Because interest rates rise after Fed rate hikes, it's an excellent time to improve your odds of lower rates by taking actions to raise your credit score. A good credit score opens the doors to better opportunities and lower rates with banks, lenders, and credit card issuers. It can also help you get approved for credit limit increases and other changes to your credit accounts.

You may improve your score by consistently making on-time payments, paying down credit accounts, and keeping older credit accounts open. Also, check your credit report for any errors or omissions affecting your current score.

Switch to High-Yield Savings

If you're currently saving money in a traditional savings account, consider moving your money to a high-yield bank account, like a high-yield savings account (HYSA) or money market account. These accounts are generally available through online banks and offer much higher, more competitive rates than what you'll find at your local bank. Often, online banks don't charge monthly fees on HYSAs, which leaves more savings in your account earning interest.

Recommended High-Yield Savings Accounts

Bank Account	APY	Features	Learn More
BrioDirect High-Yield Savings Account Open Account	4.85% More Info *Annual Percentage Yield (APY) is variable and is accurate as of 11/15/2024. Rate is subject to certain terms and conditions. You must deposit at least $5,000 to open your account and maintain $25 to earn the disclosed APY. Rate and APY may change at any time. Fees may reduce earnings.	$5,000 min. deposit No monthly fee	Open Account
Axos ONE® Savings and Checking Bundle Open Account	Up to 4.86% More Info Earn up to 4.86% APY on savings, and 0.51% APY on checking when you meet requirements.	No minimum deposit No monthly fee	Open Account
SoFi Checking and Savings Open Account Member FDIC Member FDIC	0.50% - 4.00% More Info SoFi members with Direct Deposit or $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either Direct Deposit or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi members with direct deposit are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.	No minimum deposit No monthly fee	Open Account
CIT Bank Platinum Savings Account Open Account	4.35% More Info Earn 4.35% APY on balances over $5,000. Balances of less than $5,000 earn 0.25% APY. Annual Percentage Yield is accurate as of December 20, 2024. Interest rates for the Platinum Savings account are variable and subject to change at any time without notice.	$100 minimum deposit No monthly fee	Open Account

What Not To Do When the Fed Raises Interest Rates

Just because the Fed announces a rate hike doesn't mean you must upend your entire financial plan. Sometimes, doing nothing is the right course of action. Here are some actions not to take when the Fed raises interest rates.

Overextend Yourself Financially

The Fed raises rates in an attempt to curb inflation. You're probably already spending more of your monthly budget due to inflation and potentially more if you carry balances on your credit cards.

If you're financially vulnerable, now is not the time to extend yourself further with spending or borrowing. Instead, work to pay off any existing debt and save more.

Make Short-Term Financial Decisions Based on Fear

Don't let market volatility affect your long-term financial plan. That's easier said than done, especially if your investment values plummet. 

If you're a long-time investor with decades left until retirement, you'll inevitably experience the roller coaster ups and downs of the market. There are always risks with investing, but if you're investing for the long haul, it may not be a good idea to react to every fluctuation.

Be sure to consult with a certified financial advisor about your specific situation before making any major changes to your investments.

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Stop Saving

Savings works best when you let compound interest do its thing. If you can, continue to deposit funds into savings to continue taking advantage of the interest you're earning. Your savings may not keep up with inflation, but it's still an important part of any financial plan, especially if you rely on it for emergencies.

Understand the Effects of Rate Hikes

Knowing how rate hikes work can help you avoid some of the adverse effects consumers feel. Stay informed to know when interest rates might change and take advantage of the opportunities they can present. Determine which actions outlined above you need to take to improve your financial situation.