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The Federal Reserve’s decision on Wednesday to keep its overnight bank lending rate where it is — following a full percentage point cut last year — means you still have an opportunity to enjoy solid, inflation-beating returns on your savings if you’re smart about where you put them.
At the same time, because the Fed’s rate moves (or inaction) can directly or indirectly influence rates on a range of consumer loans and financial products, you’ll want to do what you can to limit the interest payments on your debts so you don’t spend a dollar more than necessary.
“Borrowers shouldn’t bank on the Fed being in any hurry to cut interest rates again, so focus on paying down high-cost debt. On the bright side, savers will continue to enjoy returns that outpace inflation if the money is parked in the most competitive (accounts),” said Greg McBride, chief financial analyst at Bankrate.
Here are some recommended ways to accomplish both your savings and debt goals.
Most people with savings accounts at the biggest banks settle for paltry returns on their money — the national average interest rate on savings accounts is just 0.55%, according to Bankrate.
But you can do far better if you put the bulk of your savings — including your emergency fund money and any money you’ll need for near-term goals like an upcoming vacation or unexpected expense like a car repair — in an online high-yield savings account insured by the Federal Deposit Insurance Corporation.
Some have been paying between 4.5% to 4.75% in the past week. That means your money can grow faster than inflation, which at last reading was pacing at roughly 3%.
Alternatively, you might consider an FDIC-insured money market account. Some have rates as high as 4% to 4.75%, according to Bankrate.
Another option might be a money market mutual fund, which invests in short-term, low-risk debt instruments. Such funds are offering an average return of 4.19% this week, according to Crane Data. While money market funds are not insured by the FDIC, if you invest through your brokerage, your overall account is likely to be insured by the Securities Investor Protection Corp.
For savings that you don’t necessarily need within three to six months but want access to in the next three to five years for intermediate-term goals like having a down payment to buy a home or helping to pay for your living expenses in the first year or two of retirement, you might consider certificates of deposit, US Treasuries or AAA-rated municipal bonds. Each have different tax implications and different rules for early withdrawals.
FDIC-insured CDs require you to lock up your money for a given period of time, and the earnings are fully taxable at both the federal and state level. CDs ranging in duration from three months to five years were yielding between 4.25% and 4.65% on Wednesday ahead of the Fed meeting, according to options listed on Schwab.com.
US Treasuries of durations between three months and five years were offering yields between 4.19% and 4.34%. Interest earned from Treasuries is exempt from state and local taxes, so may be a better option if you live in a high-tax area.
And AAA-rated municipal bonds with durations of three months to five years were paying between 2.61% and 4.21%, according to offerings on Schwab.com. Earnings on munis are typically exempt from federal tax. And if you buy one issued by the state where you file your state taxes, it may be exempt from state and local taxes too, according to TurboTax. So high-quality munis can be a good option if you’re in a high tax bracket, live in a high-tax area or live in a state with little to no income taxes and want an inflation-beating after-tax return.
Barring a sudden economic downturn, Fed watchers do not expect the Fed to cut its key rate again for many months. And if there is a rise in inflation, as some expect may occur as a result of President Donald Trump’s proposed tariffs, it’s also possible that the Fed might even raise rates.
So you can pretty much count on the interest payments you make on your debts to remain costly — unless you proactively try to reduce their impact.
“Anyone hoping [the Fed will] rescue you from high interest rates anytime soon is going to be really disappointed. That’s true whether you’re talking about mortgages, auto loans, credit cards or most anything else,” said LendingTree credit expert Matt Schultz. “That means it is maybe more important than ever to get that high-interest debt under control.”
Beyond the suggestions below on how to do that, you will always improve your chances of securing a more favorable interest rate on any loan you seek when you have a good credit score. “It is quite possible that there will be fewer rate cuts over the course of (this) year than anticipated only a few months ago,” said Michele Ranieri, a vice president at TransUnion. “Consumers should continue to monitor their own credit scores and credit reports to make sure they are in the best possible position to act when rates do come down.”
Your credit cards: The average variable rate on credit cards is currently 20.14%, down a hair from 20.35% when the Fed met last December, and lower than the 20.79% record high set in August 2024, according to Bankrate.
And for new cards being issued, the average rate tops 24%, according to Lending Tree.
In all cases, such rates are punitively high if you’re not able to pay off your credit card bill in full and on time every month.
There are a few ways to reduce your burden. First and best among them is to apply for a 0% balance transfer card, which would let you meaningfully pay down your principal over the next 12 to 18 months without incurring any interest charges.
If that’s not an option, Schultz thinks consolidating all your high-rate credit card debt into a personal loan with a much lower rate can make a big difference to your bottom line. The average rate on a personal loan was 12.46% as of January 22, according to Bankrate. But the higher your credit score and the lower your debt-to-income ratio, the better your rate will be, especially if you comparison shop for the most favorable loan.
And lastly, if neither of those options work, call your credit card issuer and ask them to lower your rate. “It works more often than you might think,” Schultz said.
Your home: Mortgage rates are most directly tied to movement in the 10-year US Treasury yield, which is influenced by economic factors such as inflation and growth expectations, in addition to anticipation of the Fed’s next action.
So even though the Fed cut its key rate three times last year, mortgage rates didn’t follow suit and in some instances are even a little higher than where they were a year ago.
“If the Fed were to cut the Fed funds rate, bonds could go either way. It would be the same if they were to raise rates. There are a lot of unknowns at the moment,” said Melissa Cohn, regional vice president at William Raveis Mortgage.
As of January 23, the 30-year fixed-rate mortgage averaged 6.96%, down from the week prior when it averaged 7.04%, according to Freddie Mac. A year ago, the 30-year averaged 6.69%.
So if you’re carrying a mortgage with a rate well above 7%, you might do the math to see if it pays to refinance your loan to secure a lower rate. McBride suggests that if you’re able to cut your rate by at least one-half to three-quarters of a percentage point, a refi may be worth considering.
If you’ve borrowed against your home equity, it likely is not cheap money and won’t get cheaper anytime soon. As of January 22, per Bankrate, the average rate on a home equity loan was 8.45% and the average rate on a home equity line of credit was 8.28%.
Unless you have secured a loan that is considerably cheaper, making an effort to pay down what you’ve borrowed as soon as feasible can save you real money in the long run.
If you’re thinking of getting a HELOC to serve as an emergency lifeline — and so potentially may never tap it — the rate may be less of a concern. But know that you may still have to part with some money to maintain the credit line, in terms of closing costs, minimum withdrawal requirements or ancillary expenses, such as an annual fee or inactivity fee.
Your car: Average interest rates on new car loans (7.1%) and used car loans (10.8%) as of December were each down about half a percentage point from where they were before the Fed started cutting rates in September 2024, according to data from car site Edmunds.com.
But that is not enough of a drop to justify refinancing an existing car loan you may have got in the past year or two. Here’s why: A full percentage point drop might only save you $16 a month on a $35,000 car loan, according to Bankrate.
One possible exception, however, is if you have an existing loan at a very high rate — e.g., 15% or more — and in the time since you got that loan your credit score has greatly improved. “Then it might be worth considering,” said Jessica Caldwell, head of insights at Edmunds.com.
For anyone who plans to purchase a car in the next several months, she said, don’t assume you’ll get a better deal buying a used car. That’s because loans for new cars and certified pre-owned cars often come with subsidized loan incentives, which along with the latest drop in rates might result in better savings for you than a specific used car loan you’re considering. Her advice: Shop around to see what you can get. And then do the math to figure out how much you will be paying in interest over the life of the loan.
