The Federal Reserve (Fed) plays a key role in the U.S. economy. The Fed can increase or decrease the rate that banks charge each other for short-term loans to influence the economy, whether to stimulate investment, promote economic growth, and / or respond to inflation, among other objectives. In early 2020, the Fed reduced its Target Fed Funds rates to almost zero percent.

The Fed’s interest rate changes may also influence the rates offered by banks on deposit and credit products, though banks consider additional factors when determining the interest rate offered to customers. In a low to zero interest rate environment, the steps to take depend on your accounts and financial priorities. Here are some tips to consider in response to this interest rate environment.

How might low or zero interest rates affect me?

The Fed’s low to zero interest rates may influence you, depending on what deposits, loans, and other accounts you have. For example:

  • If you have deposits in an interest-bearing bank account, you may receive lower interest paid on your deposits.
  • If you have a credit product with an interest rate based on an index, like the Prime Rate, then you might be charged a lower interest rate. For example, with a variable-rate credit card, the rate and payment for customers carrying a balance may go down.

However, if your loan has a fixed interest rate, such as a fixed rate mortgage, your loan will not be impacted by changes in the interest rate environment. In addition, your monthly principal and interest payment will also remain the same.

What steps should I consider in a low interest rate environment?

Here are some actions to consider in this low interest rate environment.

  • Continue saving. Saving is always important - even more so during uncertain times.
    • Whether interest rates are low or high, paying yourself first by saving regularly is a good healthy financial habit.
    • Consider having at least 3 to 6 months of expenses in emergency savings to help tide you over if you experience unexpected expenses or layoffs. Savings also keeps you on track for future goals like paying for college or buying a home.
    • If you received a tax refund or have money left over due to changes in your spending, allocate these extra funds towards savings.
    • Consider using your checking or savings accounts, both of which are FDIC-insured up to the maximum applicable limits at Wells Fargo.
  • Check if refinancing is an option. If you refinance existing debt at a lower interest rate, your monthly payment may decrease, freeing up cash to put toward other financial goals. It is a good idea to check your credit score before applying, as your credit history and credit score affect the interest rate and the amount you may be able to borrow. Additionally, there may be costs to consider when refinancing, e.g., closing costs, origination fees, and other expenses. Be sure to understand the total cost of borrowing, if you are extending for a term longer than the original loan because you may end up paying more interest over time. 
  • Use credit wisely. Whether using your existing available credit or applying for new credit, it’s important to have a plan to repay the debt.
    • Consider putting your credit to work to meet your goals and objectives, particularly if your available credit has a variable rate.
    • Lower interest rates may be a good opportunity to apply for credit for meeting your priorities and needs. Low mortgage rates can make homeownership more attainable for qualified borrowers. Financing for college, car buying, or other priorities may also be more affordable.
    • It may help to know what lenders look for before you decide to apply for credit. Your credit history and credit score are key factors in determining the interest rate, amount, and options that may be available to you, so check your credit score to know where you stand.
    • Entrepreneurs may also want to consider applying for financing their small business for equipment purchases or other needs.

During these times, it can be challenging to determine what to do next or whether to take any action at all. Whether interest rates decrease or increase, your deposits in the FDIC-insured accounts at Wells Fargo have the protection of FDIC insurance within the maximum applicable limits.

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