It seems like it’s been in the news constantly over the past few months: the Federal Reserve raises interest rates. But how does that impact you and your finances on a daily basis? It depends on your situation, but there can be both good news and challenges in the months ahead.

The Federal Reserve, or “the Fed,” is the central banking system of the U.S.; it regulates banks and sets monetary policies. It’s important to understand that the Fed doesn’t control the interest rate on your credit card, mortgage, or auto loan. Instead, the Fed sets the “benchmark interest rate,” which is the rate that financial institutions can charge one another. That rate, in turn, is considered by your financial institution when it determines rates for account holders.

Much of the media coverage focuses on the Fed’s strategies and whether they’re helping the economy or not. This article will simply focus on how changes could impact you and your wallet.

Costlier Credit Cards

When the Fed raises rates, it’s highly likely the annual percentage rate (APR) on your credit card will go up as well. So, if you’re carrying a balance on a credit card from month to month, it will cost you more in monthly interest charges. To avoid those costs, pay off any outstanding balances. And if you can, pay off the balance in full each month. If you can’t, consider a “balance transfer” offer to consolidate balances to a single lower-rate credit card. Some institutions offer low-rate balance transfers that charge a low introductory rate for a temporary period. Just remember, with an increase in APR, it becomes more expensive to carry credit card debt every month.

More for Mortgages

Rising interest rates mean potentially higher mortgage payments for people looking for a home loan. Higher payments typically mean fewer buyers and lower home sales. For example, after this year’s rate hikes, the number of homes sold in the U.S. fell by about 20% in August 2022 compared to the same time in the previous year, according to the National Association of Realtors. When buying a home in the current market, many consumers are trying to lock in a fixed-rate mortgage, which means that the interest rate will never change, even if the Fed continues to raise rates. However, not all consumers qualify and an adjustable-rate mortgage, in which the rate can still go up, may be a more feasible option. If interest rates stabilize or even go down in the next few years, owners who are buying now can consider refinancing their mortgages to take advantage of more favorable rates and increased home equity.

Something for Savers

The good news is: if you’re a saver, the market is in your favor. The higher the Fed’s rate goes, the better the chance for increased yields on savings accounts. Financial institutions typically raise their annual percentage yield (APY) for savings accounts in this market environment. Rates for certificates (certificates of deposit) usually go up as well. A savings strategy is not particularly exciting or dramatic, but it is an important foundation for your personal financial health. The increase in APY means you get greater rewards for consistently building your savings account, earning more as you save more.

Playing the Long Game

You can see how changing interest rates can impact your wallet, as well as the financial institutions you work with. In its simplest form, the Fed uses interest rates as a tool for keeping the national economy in balance and functioning as smoothly as possible. And as an account holder, you are part of the millions of consumers and businesses who are part of, and contribute to, the national economy.

For your personal finances, it’s usually best to play the “long game”: make decisions based on long-term goals and don’t be overly concerned about fluctuations in the interest rates. Pay closer attention if you’re in the market for a large purchase, such as a house, and talk with a financial professional who can provide insights and guide you through the process.