In December 2024, the Federal Reserve reduced its benchmark interest rate, marking the third consecutive cut this year. As a result, interest rates on credit cards, loans, and deposit products have been falling as well — good news for borrowers, but not so great for savers. That’s a stark contrast to earlier this year, when it was more expensive to borrow money, but you could also earn above 5% on your savings.Understanding the pros and cons of high versus low interest rates is key to making informed decisions, whether you’re saving for the future or managing debt. So, do we want higher or lower rates? The answer isn’t exactly simple.The Federal Reserve is mandated by Congress to promote stable prices and maximum employment within the US economy. One of the tools it has at its disposal to achieve these goals is the federal funds rate.During times of high inflation, for instance, the Fed will raise its federal funds rate, which is the rate banks charge each other for overnight loans to meet cash reserve requirements.When the federal funds rate increases, financial institutions also increase interest rates on certain types of loans, such as credit cards, auto loans, personal loans, and, less directly, mortgages. Many of them also increase the interest rates on their savings products to expand their lending capacity. This makes it more expensive for Americans to borrow money, but it also means they can earn more on their savings balances.On the other hand, if the Fed wants to stimulate economic growth, it will lower the federal funds rate. When this happens, loan interest rates also go down, encouraging borrowing and spending among consumers and businesses. The downside is that deposit accounts pay less interest, stunting savers’ ability to grow their savings.Read more: Fed rate cut: How it affects your bank accounts, loans, credit cards, and investmentsDepending on your situation, higher interest rates can either help or hurt your financial well-being. Here are some benefits and drawbacks to consider. Better savings rates: If you have a lot of cash in savings, you may benefit from higher rates. In some cases, high-yield savings accounts can offer rates roughly 10 times the national average (or higher). No impact on existing fixed-rate loans: If you took out a loan with a fixed interest rate before market rates started to climb, your monthly payments won’t be impacted. Incentivizes financial discipline: Higher borrowing costs can help discourage taking on impulsive or unnecessary debt, prompting you to focus more on budgeting and saving. Read more: 10 best high-yield savings accounts available today New loans are more expensive: If you take out a new loan when interest rates are elevated — whether it has a fixed or a variable interest rate — you’ll be charged a higher APR, even if you have excellent credit. This may translate to higher monthly payments, spending more in interest over the life of the loan, and/or having to take out a
Ven. Gen 17th, 2025
