The Fed has now cut interest rates three times. Here are 12 key money moves to make

The Federal Reserve cut interest rates for the third straight meeting, ushering in a new era for monetary policy — and the consumers who plan their finances around it — after two and a half years of the highest interest rates in decades.

The Federal Open Market Committee (FOMC) decided to cut interest rates by a quarter of a percentage point when it wrapped up its December gathering. The Fed’s decision brings its key borrowing benchmark, the federal funds rate, down to a new target range of 4.25-4.5 percent.

Policymakers, however, might not cut interest rates much more in the months ahead, new projections released in December revealed, as inflation stubbornly holds above 2 percent.

The Fed sets a key benchmark interest rate that has a domino effect on virtually every borrowing cost that consumers pay — from credit cards and auto loans, to adjustable-rate mortgages and personal loans. Rates tend to move in lockstep, meaning cuts from the Fed are the key to making it cheaper to borrow money.

Even after three straight cuts, financing costs remain pricier than they were in the coronavirus pandemic-era. Still, any turning point in Fed policy means it’s a good time to revisit your financial strategy. Here’s your 12-step plan for taking charge of your wallet after a rate cut from the Fed.

1. Get a snapshot of your personal finances

Now that the Fed has cut interest rates multiple times, money questions are probably swirling within many consumers’ heads. Should I refinance? Should I finally finance that new car I’ve been hoping to buy? Should I buy a home now, or wait?

Before you can answer any of those questions, you’ll need to get an idea of your current financial state, including how much debt and savings you have. Once you form a baseline understanding, you’ll be better informed about your financial strengths — and your potential weak spots. After all: There’s hardly a perfect time to make a big-ticket purchase. It all comes down to your wallet and whether you’re ready for it.

Print out statements from any account housing liquid cash — or money you could withdraw without penalty. Those are most likely savings accounts, but they could also be funds in a money market account or no-penalty CD. Even better, note each account’s annual percentage yield (APY).

Next, list your debt, including your outstanding balance and the interest rate you’re charged. Keep tabs on whether that debt has a fixed or variable rate, and note how much interest you pay per month.

Then, keep track of the income and expenses flowing in and out of your budget each month.

2. Keep chipping away at high-interest rate debt

One piece of advice stays the same, regardless of how high (or low) interest rates are: Prioritize eliminating your high-interest rate debt.

High-cost debt commonly comes from a credit card, a form of unsecured debt that tends to charge interest rates much higher than the Fed’s benchmark. Back in 2020, for example, the average credit card rate hovered around 16 percent even though the federal funds rate was in a target range of 0-0.25 percent.

Credit card annual percentage rates (APRs) are also much slower to fall. Case in point: The Fed has now cut interest rates a full percentage point since September, yet the average credit card annual percentage rate (APR) has dropped just 43 basis points and remains close to 21 percent, according to Bankrate data.

If you aren’t paying off your balance in full each billing cycle, it’s likely costing you hundreds — if not thousands — of extra dollars a month. Many Americans might be finding themselves in this situation, as pricier essentials and higher interest rates compound to create a cycle of debt. Almost 2 in 5 cardholders (37 percent) have maxed out a credit card or come close since the Federal Reserve began raising interest rates in March 2022, according to Bankrate’s Credit Utilization Survey.

“The Fed’s going to have to cut rates a whole bunch of times before your rate gets below 21 percent,” McBride says. “Interest rates aren’t going to fall far enough, fast enough to bail you out of a bad situation.”

Consider consolidating your outstanding balance with a balance-transfer card. Most cards start borrowers with a rate as low as zero percent for a specified number of months — currently a maximum of 21 months — before transitioning to the regular annual percentage rate (APR). The economy’s resilience is also good for borrowers with credit card debt: Issuers are less inclined to take those consolidation offers off the market or be pickier about who they approve for them.

The same advice doesn’t apply to those with fixed-rate debts such as mortgages or car loans with “low and mid-to-single-digit rates,” McBride says. You might be better off putting that money toward other avenues that meet your financial goals, such as saving or investing.

3. Shop around for the most competitive borrowing rates

Loans that directly track the federal funds rate — such as home equity loans and home equity lines of credit (HELOCs), adjustable-rate mortgages, credit cards, car loans and more — could begin to fall in the immediate weeks after the Fed cuts interest rates. If you’re in the market for a loan or thinking about making a big-ticket purchase that requires financing, shopping around will be one of the most important steps a consumer can take in a falling-rate era.

Some lenders might be even more inclined to offer better deals than others to lure new customers. Financial experts typically recommend comparing offers from at least three lenders before locking in a loan.

Keep in mind, however, that Americans with fixed-rate debts won’t feel any impact when the Fed adjusts borrowing costs. Those with variable-rate debts could see their interest rate change within one-to-two billing cycles.

4. Mortgage rates aren’t guaranteed to fall when the Fed cuts rates, limiting your refinance opportunities

One benefit to reconfirming the interest rates you’re paying if you do have debt: You’ll be more informed to act quickly if a window to refinance suddenly opens.

Sometimes, though, those decisions come down to more than just financial reasons. For example, refinancing a longer-dated debt such as a fixed-rate mortgage might also depend on how long you plan to stay in your home, according to McBride.

“If you can reduce your fixed mortgage rate by one-half to three-quarters of a percentage point, it is time to do the math on how quickly the monthly savings will recoup the costs of refinancing,” he says. “If you’re planning on moving in the next 3 to 5 years, it probably won’t be worth it.”

If you locked in a mortgage when rates peaked at a 20-plus year high of 8.01 percent, you might stand to save through replacing your existing mortgage with a new one. The opportunity that’s currently in front of you, however, isn’t as good as it was just three months ago. The average 30-year fixed-rate mortgage has actually increased more than half a percentage point since the Fed started borrowing costs.  

Meanwhile, there’s not as much urgency to refinance variable-rate loans when interest rates are falling — “unless you can shave a couple of percentage points” off your interest rate, McBride says. Just be sure to calculate the fees and new monthly payment to determine whether the change is worth it.

5. Work on boosting your credit score

If there’s any factor that inhibits consumers’ ability to borrow cheaply more than the Fed, it’s their personal credit scores. Most of the time, financial companies save the best rate for the so-called “safest” borrowers: those with good-to-excellent credit scores and a reliable credit profile.

Companies even tend to grow pickier about who they approve for loans when rates are high. Half of applicants have been rejected for a loan or financial product since the Fed started raising interest rates, a Bankrate survey from March found. Rejection rates were highest for individuals with credit scores below 670.

To improve your credit score, concentrate on making all of your debt payments on time and keeping your credit utilization ratio as low as possible — the two factors with the biggest influence on how your rating is calculated.

6. Think twice about big-ticket purchases, but you can’t always time the market

How much the Fed cuts interest rates depends on the broader U.S. economy, including how quickly inflation — or the job market — is slowing.

Consumers who can afford to wait might benefit from holding off on any big-ticket purchases that require financing.

Even modest rate reductions can translate to major savings. For instance, financing $500,000 on a 30-year fixed-rate mortgage at 6 percent would cost about $255 less a month than it would today, with rates currently at 6.78 percent, Bankrate’s mortgage calculator shows.

To be sure, though, consumers can’t always successfully time the market. A car can break down or a roof can need repairing regardless of the rate environment. The Fed also might not cut interest rates enough in 2025 to make waiting worth it. 

“If your dishwasher breaks and you need a new one but it means financing it, are you going to wash the dishes by hand in the next six months in hopes that you can finance it at a lower rate at the end of the year?” McBride says. “Rates aren’t going to come down fast enough or soon enough to validate that decision.”

7. Keep up frequent communication with your credit card issuers

Issuers might also be inclined to give you a new APR if your credit score improves, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.

It leads to another crucial step in your financial plan: opening up the channels of communication with your credit card issuer.

“It’s sad how few people talk to their creditors when times are good because it’s when you have those conversations, you realize a lot of really great things you could be doing to save even more money,” he says.

In today’s high-rate environment, it’s worth reviewing your cardholder agreement and making sure you know how your issuer calculates your APR. Credit card companies, by law, have to give cardholders a 45-day notice if they’re going to increase their cardholder’s interest rate for reasons other than responding to the Fed.

“Credit card companies do have some latitude in deciding when and how much to increase a cardholder’s interest rates within the confines and constraints of the Card Act,” McClary says. “It’s in those areas that the details are going to be in the cardholder agreement.”

8. The good times will keep on rolling for savers, even as the Fed cuts interest rates

Yields on savings accounts and CDs will edge lower the more the Fed cuts interest rates, but that shouldn’t disappoint savers too much. What’s most important for savers is whether the cash they’re keeping on the sidelines is growing faster than the overall rate of inflation. 

The highest-yielding online savings account is offering a 4.85 percent APY, almost two times higher than the current annual inflation rate of 2.7 percent, according to the latest data from the Bureau of Labor Statistics’ consumer price index (CPI).

“While returns will decline as interest rates fall, savers seeking out the most competitive offers will remain well ahead of inflation for the foreseeable future,” McBride says.

Typically, online banks can reward their depositors with higher yields because they don’t have to pay the overhead associated with operating a brick-and-mortar financial institution.

But saving money isn’t just about yield-chasing. A crucial part of any financial plan is having cash for emergencies. Experts typically recommend storing six months’ worth of expenses in a liquid and accessible account. Even if you can’t afford to stash that much away, any little bit can help protect you from accruing high-cost credit card debt when an unexpected expense pops up.

“Building a rainy day fund is really important, even if the interest rate you’re earning on those funds is lower than the inflation rate,” says Mike Schenk, deputy chief advocacy officer at the Credit Union National Association. “Put a little bit into a savings account over time, and before you know it, you’ll have a chunk of savings that can give you a better night’s sleep at the very least.”

9. If you already have an emergency fund, now’s the time to lock in a long-term CD

The mere expectation of the Fed reducing rates in the near-future has already sent yields lower. Case in point: 

• Highest-yielding 5-year CD: 4.25% (peak: 4.85%)
• Highest-yielding 2-year CD: 4.29% (peak: 5.75%)
• Highest-yielding savings account: 4.85% (peak: 5.55%)

If you already have at least six to nine months’ worth of expenses stashed away in a savings account and don’t mind locking away your cash, a CD might be a strong — and safe — way to add some yield to your portfolio of investments, including for retirees. There’s no monetary benefit to waiting to lock one in, McBride says.

“Now is the time to lock in high-yielding CDs,” McBride says. “There is no advantage to waiting, as yields will trend lower as we get closer to the first Fed rate cut and accelerate further the longer you wait.”

10. Start recession-proofing your finances

The chances of the Fed slowing inflation without causing a recession look brighter than they did in 2022, and rate cuts are intended to make sure those odds stay that way.

Yet, it’s still wise to prepare for the unexpected. Monetary policy is positioned to keep weighing on economic growth, even as the Fed starts dialing back interest rates.

Recessions aren’t always as severe as the coronavirus pandemic, the Great Recession or even the Great Depression almost a century ago. They do, however, mean increased joblessness, reduced hiring or job security, as well as market volatility.

That means it’s important to start thinking about how you’d stay afloat in a recession. No matter how strong the U.S. economy is, it’s always important to live within your means, chip away at your debts and make sure you can cover a period of joblessness.

11. Think about your career and income opportunities

When the cost of living rises or the economic outlook seems shaky, one of the best investments you can make is in yourself. Think about ways to increase your earnings opportunities over your lifetime, whether by getting more training, education or increasing your skills. Joblessness is typically lower for those with a bachelor’s degree or higher — even during recessions, according to data from the Labor Department.

“You have to be looking down the road because what’s far more impactful to household finances than an increase in interest rates is a job loss or a significant decline in wealth,” McBride says. “Those are the types of things that happen in a recession.”

12. Tune out market volatility if you’re investing for the long term

High rates typically cause market dysfunction. In 2022, for example, the S&P 500 plunged roughly 20 percent, the worst year for the major stock index since 2008.

Financial markets haven’t been as downtrodden in 2024, but the optimism might not last forever. The Fed cutting interest rates less than investors expect in 2025 could spur some market volatility, making investors fearful about economic growth and companies’ continued profit growth.

But it shouldn’t mean anything for long-term investors, especially those who are saving for retirement. If you’re investing over a time horizon that spans decades, you’ll no doubt have to endure both booms and busts. Downdrafts in the market are also a powerful buying opportunity. Investing comes with risks, but it’s historically the best way to beat inflation over time.

“Keep on keeping on with your retirement contributions,” McBride says. “Ten years from now, you’ll be glad you did.”