The Federal Reserve’s decision on Wednesday to maintain its overnight bank lending rate, following a full percentage point cut last year, presents an ongoing opportunity for smart savers to earn solid, inflation-beating returns.
At the same time, because the Fed's rate decisions can directly or indirectly affect rates on various consumer loans and financial products, it's crucial to manage your debt to minimize interest payments and avoid unnecessary spending.
“Borrowers shouldn’t expect the Fed to rush into further rate cuts, so it’s important to focus on paying down high-interest debt. On the positive side, savers can continue to earn returns that outpace inflation if they choose the right accounts,” said Greg McBride, chief financial analyst at Bankrate.
Here are some strategies to help you achieve both savings growth and effective debt management:
Savings
Many people with savings accounts at large banks settle for low returns, with the national average interest rate on savings accounts sitting at just 0.55%, according to Bankrate. However, you can earn significantly more by placing the majority of your savings—such as emergency funds and money set aside for near-term expenses like vacations or unexpected car repairs—into an online high-yield savings account insured by the Federal Deposit Insurance Corporation (FDIC). This way, you can maximize your returns while keeping your money safe.
In the past week, some high-yield savings accounts have been offering rates between 4.5% and 4.75%. This allows your money to grow faster than inflation, which is currently around 3%.
Another option to consider is an FDIC-insured money market account, with some offering rates between 4% and 4.75%, according to Bankrate.
Alternatively, a money market mutual fund could be a good choice. These funds invest in short-term, low-risk debt instruments and are currently offering an average return of 4.19%, according to Crane Data. While money market mutual funds are not insured by the FDIC, if you invest through a brokerage, your overall account may be protected by the Securities Investor Protection Corp.
For savings that aren’t needed within the next three to six months but are intended for intermediate-term goals—such as a down payment on a home or covering living expenses in the first couple of years of retirement—you might consider certificates of deposit (CDs), U.S. Treasuries, or AAA-rated municipal bonds. Each option has its own tax implications and rules regarding early withdrawals.
FDIC-insured Certificates of Deposit (CDs) require you to lock in your money for a specified period, and the interest earned is fully taxable at both the federal and state levels. As of Wednesday, ahead of the Fed meeting, CDs with durations ranging from three months to five years were offering yields between 4.25% and 4.65%, based on options listed on Schwab.com.
U.S. Treasuries with durations between three months and five years were yielding between 4.19% and 4.34%. One advantage of Treasuries is that the interest earned is exempt from state and local taxes, making them a more attractive option if you reside in a high-tax state.
AAA-rated municipal bonds with similar durations (three months to five years) were offering yields between 2.61% and 4.21%, according to Schwab.com. The interest on municipal bonds is typically exempt from federal taxes. Additionally, if you buy bonds issued by your home state, they may be exempt from state and local taxes as well, according to TurboTax. High-quality municipal bonds are a solid choice for individuals in higher tax brackets or living in high-tax areas, as they offer inflation-beating after-tax returns.
Managing Your Debts
Unless there’s an unexpected economic downturn, experts don't anticipate the Fed cutting its key interest rate for several months. Furthermore, if inflation rises—potentially due to proposed tariffs by former President Donald Trump—it’s possible the Fed could even raise rates.
As a result, you can expect the cost of servicing your debt to remain high unless you take proactive steps to reduce the impact.
“Anyone expecting the Fed to rescue them from high interest rates anytime soon is going to be sorely disappointed,” warned LendingTree credit expert Matt Schultz. “This holds true whether you're dealing with mortgages, auto loans, credit cards, or nearly anything else. That makes it more important than ever to get high-interest debt under control.”
In addition to the strategies outlined below, maintaining a good credit score will always improve your chances of securing a better interest rate on any future loans. "It’s possible there will be fewer rate cuts this year than previously expected," said Michele Ranieri, a vice president at TransUnion. "Consumers should continue to monitor their credit scores and reports to ensure they are in the best possible position to act when rates eventually come down."
Your Credit Cards
The average variable interest rate on credit cards is currently 20.14%, slightly down from 20.35% when the Fed met in December, and lower than the 20.79% peak set in August 2024, according to Bankrate. For new credit cards, the average rate now exceeds 24%, according to LendingTree.
These rates are extremely high if you’re unable to pay off your credit card balance in full and on time every month. Fortunately, there are several strategies you can use to reduce this burden:
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Apply for a 0% Balance Transfer Card
The best option is to apply for a 0% balance transfer card, which allows you to pay down your principal over 12 to 18 months without accruing interest charges. -
Consolidate Debt with a Personal Loan
If a balance transfer isn't an option, consolidating your high-rate credit card debt into a personal loan with a much lower rate can significantly reduce your interest payments. As of January 22, the average rate on a personal loan was 12.46%, according to Bankrate. The better your credit score and debt-to-income ratio, the better rate you can secure, especially if you shop around for the best loan. -
Negotiate a Lower Rate
If neither of the above options works, try calling your credit card issuer and asking for a lower interest rate. “It works more often than you might think,” said Schultz.
By staying proactive about your debt management and credit health, you can make meaningful progress in reducing your interest burdens.
Your Home
Mortgage rates are primarily influenced by the 10-year U.S. Treasury yield, which is affected by economic factors like inflation, growth expectations, and speculation about the Fed's next move.
Despite the Fed cutting its key rate three times last year, mortgage rates did not follow the same trend and, in some cases, are even slightly higher than they were a year ago.
“If the Fed were to cut the Fed funds rate, bond markets could react in different ways. It would be the same if they raised rates,” said Melissa Cohn, regional vice president at William Raveis Mortgage. "There are a lot of uncertainties right now."
As of January 23, the average 30-year fixed-rate mortgage was 6.96%, down from 7.04% the week before, according to Freddie Mac. However, a year ago, the average rate was 6.69%.
If you're carrying a mortgage with a rate significantly higher than 7%, it might be worth considering refinancing. Greg McBride, Bankrate’s chief financial analyst, suggests refinancing could be worthwhile if you can cut your rate by at least 0.5% to 0.75%.
If you have a home equity loan, it’s likely not cheap money and it won't get cheaper soon. As of January 22, the average rate on a home equity loan was 8.45%, and on a home equity line of credit (HELOC), it was 8.28%, according to Bankrate. Unless you’ve secured a much cheaper loan, it may be beneficial to pay down this debt as quickly as possible to save in the long run.
If you're considering a HELOC for emergency purposes and don't plan to tap it, the rate may be less of a concern. However, be aware of potential costs like closing fees, minimum withdrawal requirements, and annual fees.
Your Car
As of December, the average interest rate on new car loans was 7.1%, and used car loans were averaging 10.8%, according to Edmunds.com. Both rates were down about half a percentage point since the Fed started cutting rates in September 2024.
However, this decrease might not be substantial enough to justify refinancing an existing car loan you took out in the past year or two. For instance, a one-point drop could only save you about $16 per month on a $35,000 loan, according to Bankrate.
One exception might be if you have an existing loan with a very high rate (e.g., 15% or higher) and your credit score has improved significantly since you took out the loan. In this case, refinancing could be worth considering, says Jessica Caldwell, head of insights at Edmunds.com.
If you plan to purchase a car soon, don’t automatically assume buying a used car will offer a better deal. New and certified pre-owned car loans often come with subsidized loan incentives, which, when combined with the recent rate drop, could result in better savings than a used car loan. Caldwell recommends shopping around and comparing the total cost of ownership—including interest—before making a decision.
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