Things to watch when interest rates go up

The Federal Reserve raised interest rates seven times in 2022 and twice — so far — in 2023, with the most recent increase of 0.25% occurring in March 2023.

Its aim is to cool inflation, which is near its highest levels since the ’80s. In a recent Reuters poll, economists predicted only one more hike because worries about the banking sector and an economic downturn have surfaced.

An aggressive rate-raising strategy can take a toll on many aspects of consumer life, possibly for years to come. To protect your money, learn more about what to watch when interest rates go up:

— Variable loan rates rise.

— Bond markets fall.

— CD returns rise.

— Savings account returns rise.

— Money market account returns rise.

— Mortgage costs might rise.

— Credit card rates rise.

— Your credit score may fall.

— Personal loan costs rise.

— The Federal Reserve may act.

[Related:How You Can Protect Your Money in the Wake of Banking Collapses]

Variable Loan Rates Rise

Borrowers holding a variable prime rate loan, also known as an adjustable-rate loan, will see their payments rise as interest rates rise. Unlike a fixed-rate loan, the cost of a variable loan can climb quickly.

“The long-term effects can be really huge,” Matt Schulz, chief credit analyst at LendingTree, says. “We’re talking about thousands and thousands of dollars paid in mortgage interest, personal loan interest and auto loan interest, and all of that adds up.”

When interest rates are slated to rise, it may be wise to convert a variable loan into a fixed one — or pay off the variable loan as soon as possible.

Bond Markets Fall

Bond markets tend to fall as interest rates rise. In May 2022, Federal Reserve Chair Jerome Powell announced the central bank would reduce its $9 trillion stockpile of treasury bonds and mortgage-backed securities starting in June to further reduce market liquidity.

Short- and long-term treasury bond yields, however, were up year over year and month over month for much of the past year — although some are now beginning to decline. Consider adjusting your investment strategies accordingly.

[See: 7 Best Bond Funds for Retirement.]

Certificates of Deposit Returns Rise

Certificates of deposit can offer better annual percentage yields when interest rates rise — and they’re attractive to new investors. Those holding long-term CDs at lower rates, however, may want to consider withdrawing funds early (after taking into account the penalty costs) when interest rates rise significantly.

“For those who already have CDs and are comparing their old rates to the newly increased ones, they may feel they are missing out,” Simon Zhen, chief research analyst at MyBankTracker, says.

“One strategy I recommend is called laddering, an approach some people use so they’re not tempted to jump around when interest rates change. Every year you’re taking advantage of the highest rate CDs at that point in time and diversifying your CDs,” he says.

Savings Account Returns Rise

Banks are often inclined to raise savings account rates when interest rates rise but this isn’t always the case.

“Bank balance sheets and total deposits have bloomed to more than they know what to do with,” Zhen says, citing COVID-19 pandemic-era stimulus payments.

“While Fed interest rates may be increasing, banks might not have that same level of urgency to increase savings account rates alongside them,” he says. The average annual yield on a standard savings account is 0.39% as of April 17, 2023.

[Read: Best Savings Accounts.]

Money Market Account Returns Rise

Like savings accounts, money market funds can see a greater rates of return following an interest rate hike. Typically, a money market account offers a higher rate of return than most checking or savings accounts. These funds often invest in financial instruments like CDs, bankers’ acceptances and repurchase agreements.

Mortgage Costs Might Rise

The 30-year fixed-rate mortgage is based on the long-term outlook for interest rates, and prospective buyers will see their costs rise as interest rates go up. A buyer can opt for a 15-year fixed-rate mortgage instead and benefit from a lower interest rate (but incur higher payments each month under the shorter loan term).

The national average interest rate for a 30-year fixed mortgage was 6.39% and 5.76% for a 15-year fixed mortgage as of April 20, 2023. Homeowners with fixed-rate mortgages won’t be affected by rising interest rates.

Credit Card Rates Rise

When interest rates rise, banks typically charge customers more to borrow money — and that applies to credit cards, too. The average credit card interest rate was 24.24% as of April 25, 2023.

Consumers who have cards with variable APRs will typically see rates rise as the prime rate rises.

Credit card debt is often the first place consumers feel the effects of an interest rate hike, Schulz says, adding, “That’s a really significant thing, especially given that most Americans are on a tight budget and have very thin financial margins for error.”

Your Credit Score May Fall

Higher interest rates can cause those with mortgage and credit card debt to struggle as payments rise, leading to missed payments and delinquent accounts. As a result, borrowers may see their credit scores fall when interest rates climb.

“There’s only so long that it’s realistic for people to continue to be able to make payments as interest rates and debt continue to rise,” Schulz says.

“We haven’t seen delinquencies rise across the board in a huge way yet. They’re trending that way but I think we’re going to see late payments increase and when that happens, then you’ll see credit scores start to decrease,” he says.

Personal Loan Costs Rise

Personal loan rates are relatively high right now. As of April 12, 2023, the average rate on a personal loan was 10.82%.

“High interest rates affect so many aspects of life,” Schulz says. “That makes it more expensive to get a car, it makes it much more expensive over time to buy a house. They even affect things like personal loans for debt consolidation and credit card refinancing.”

If you think you might need a personal loan to finance an upcoming large purchase, make sure you shop around to find the lowest possible rate.

The Federal Reserve May Act

In early 2020, the Federal Reserve cut interest rates to nearly zero alongside other measures to support a faltering economy amid the COVID-19 pandemic.

This is an example of when and how the Fed can take action to attempt to balance the economy. Understanding these actions can help consumers grasp the nation’s economic situation and make informed decisions regarding homeownership and debt management.

The Fed may raise interest rates at least one more time, so remember to keep an eye on it — and plan accordingly.

More from U.S. News

How to Take Advantage of Rising Interest Rates

What Interest Rate Increases Mean for Your Credit Cards

How Fed Interest Rate Hikes Affect the Stock Market

Things to Watch When Interest Rates Go Up originally appeared on

Update 05/03/23: This story was published at an earlier date and has been updated with new information.

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