Personal Finance

What an interest rate hike could mean for your money

Moves to make before Fed raises rates

Federal Reserve Chair Janet Yellen speaks with reporters at the Federal Reserve in Washington, Dec. 17, 2014.
Kevin Lamarque | Reuters

When the Federal Reserve Board will raise interest rates is still a matter of debate.

It could come as early as this week...or maybe not till next year. But one thing is certain: it's coming.

Read MoreMore of Wall Street sees later rate hike

And while the long-term result of a rate increase will be positive for consumers, short term, it's likely to be costly, said economist Richard Ebeling, the BB&T distinguished professor of ethics and free enterprise leadership at The Citadel in Charleston, South Carolina. "This entire time of quantitative easing has meant they have had access to artificially low interest costs for consumer loans, auto loans, home loans," he said. "Even a modest increase by the Fed will start nudging up all the related interest rates."

With that in mind, the shortening timeline for rising interest rates will affect your financial to-do list in these six key areas.

—By CNBC's Kelli B. Grant. Updated September 14, 2015


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Most credit cards on the market have variable rates, so expect rates to rise in tandem. If the federal funds rate increases to 1.125 percent by the end of the year (as some central bankers had forecast in the spring), consumers will pay an estimated $2 billion more in finance charges, according to comparison site

More recent surveys indicate rate increases may come at a slower pace. As of last week, the CME's FedWatch gauge assigns just a 21 percent probability for a September move, down 24 percent from the day before and 45 percent a month ago. Most traders now believe December is the most likely date.

But regardless of when or how much the rate increase will be, it's a smart idea to put any extra cash toward paying down that high-rate credit card debt now, said Odysseas Papadimitriou, chief executive of Start with your highest-rate card first. Doing so will help minimize interest charges and knock out the debt faster.

Read More Do you have the best credit card in your wallet?

Snag zero-percent balance transfer offers sooner rather than later, said Greg McBride, chief financial analyst for "As the Fed moves away from zero percent interest, credit card issuers will as well," he said.

As a long-term strategy, focus on improving your credit score. "No matter how much the Fed raises rates you can counter that by moving your credit standing to the next tier," said Papadimitriou.


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"Fixed mortgage rates often move in anticipation of what the Fed is going to do," said Keith Gumbinger, a vice president at mortgage information site There's likely to be some creep up from current levels even before the Fed officially makes a move (even if rates have remained relatively steady in recent days).

So if you're thinking about refinancing, don't wait. "Fixed mortgage rates are still below 4 percent, and that's not likely to persist the closer we get to the Fed raising short-term interest rates," said McBride. Ditto with fixed-rate home equity loans, whose rates are also likely to rise.

Read More Is it time to refinance—again?

Consumers in the market to buy a home should also get a move on—not necessarily because rates are poised to rise, but because demand could. "Anticipation of higher rates generally pulls people off the fence," said Gumbinger. "That could worsen the problem of finding a house you love at a price you love."

No need to rush on securing variable-rate home equity lines of credit, which will rise when rates do. But if you're paying down a balance on one now, this is another debt that could benefit from an early pay-down strategy. "Chip away at variable rate debt now before interest rates begin to climb," said McBride.


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Here's the upside of a rate increase: you might actually see your savings account balance generate a little interest. The average money market and savings account currently offers 0.47 percent, according to, and many consumers are earning even less. But expect a lag in increases: Banks' terms allow them to be slower to raise rates on savings products than they are on loans and credit cards, said Nick Clements, co-founder of "It's usually a rate that the bank determines and can change at their regard," he said.

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Before the Fed raises rates, avoid locking cash into any long-term certificate of deposit, he said. Rates that are high now won't be as favorable in a few months compared to other options. (Already locked in? Check the terms. It can still be beneficial to break the CD early and pay a penalty of one to two months' interest, said Clements.)

After the rate hike comes down, shop around for a better savings rate. The best tend to be with online banks, which want deposits and often compete on rates to get them, said Clements. (Currently several, including GE Capital Bank, EverBank and Synchrony Bank, are offering rates of 1 percent or better.) "As rates go up, they will be most likely to raise interest rates," he said. You could even make the switch now. "Personally, I would not wait, because it's incredibly easy to switch savings accounts," said Clements. "That's a 10-, 15-minute max process."

Auto loans

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"There's definitely a reason to think that if rates rise, it could have a rapid hit to car buying," said Karl Brauer, senior director of insights for Kelley Blue Book. Average transaction prices have climbed in recent years, he said, leading more consumers to finance vehicle purchases—and for longer terms on those fixed-rate loans.

Drivers with six months or less left on a lease would be smart to consider trading in ahead of a Fed announcement. Interest rates play into lease terms, even though drivers are borrowing the car rather than cash, said Brauer. Dealerships often let drivers end a lease a few months early, to lock you into a new contract on a new vehicle. You won't need to twist any arms. "They'll often initiate that conversation," he said.

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Buyers have more incentive to move fast. Not only are loan rates likely to be more favorable ahead of a Fed hike, but vehicle prices also tend to be more favorable in September as dealerships clear out the rest of last year's models and get an early sale push on the new ones. But there's no need to accelerate a purchase, either. "It's never good advice to buy a car purely because it's a good deal," Brauer said. "Or because the deals aren't going to be as good in the future."

Student loans

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A Fed interest rate hike has less of a direct influence on federal student loan rates, which are set each year based on the May auction of the 10-year Treasury note. A Fed hike could influence T-bill prices for next year's reset, said Mark Kantrowitz, senior vice president at "That can affect the affordability of a college education," he added.

Whether rates rise or fall, student borrowers can't do much about it. Federal loan rates are fixed, so borrowers won't see any change to their existing loans. (Undergraduate Stafford loans dispersed after July 1, 2015, and before July 1, 2016, are fixed at 4.29 percent for the life of the loan.) Private loans may be fixed, or have a variable rate tied to the Libor, prime or T-bill rates—which means that if the Fed raises rates, borrowers will likely pay more, although how much more will vary by the benchmark.

Read MoreWhat Obama's plan means for student loan borrowers

The new federal loan rates went into effect July 1, when borrowing began for the 2015-16 academic year. If rates rise, there's no way to edge around them, said Kantrowitz. The best upperclassmen can do is explore borrowing more for the current 2015-16 academic year if they haven't borrowed to the limit, he said—and that isn't necessarily the best long-term solution.


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Any Fed announcement is enough to move the market, but investors may want to pay particular attention to their bond holdings. A Fed rate hike often pushes up yields. That said, it's not easy to strategize. "Trying to time interest rates is almost as bad as trying to time the stock market," said certified financial planner Carolyn McClanahan, director of financial planning at Life Planning Partners in Jacksonville, Florida.

Read MoreStocks rip higher as fed drops 'patient'

Consumers' best bet is to have an investment policy in place that considers their time horizon and risk tolerance. "If you're in retirement, I don't care that interest rates are low," she said. "You have to have safety in your portfolio"—and that's bonds and CDs. Those investors should consider laddering their bonds or keeping terms short so they can take advantage of rising rates as the bonds mature, she said.