Key takeaways

You may have missed a big ticket item on your holiday shopping list: interest rates.

But no worries, because you can add this to your money to-do list for 2021 and still try to lock in some savings.

Most consumer financial products like mortgages and savings accounts are influenced by Federal Reserve actions, which moved its federal funds rate to basically zero in March 2020 when COVID-19 took hold in the US. Economic indicators point to the Fed holding around this level for some time.

Forecasting what will happen to interest rates is hard, though, and after such a chaotic time in 2020, everyone is shy about predicting the future. But even if the economy roars back and there are hints of inflation, which usually spurs the Federal Reserve to increase its rates, that may not happen so fast in this current environment.

“The typical Fed playbook may not look quite the same this time around, and they may wait a lot longer before they start raising rates,” says Lisa Emsbo-Mattingly, managing director of research at Fidelity.

That means if you have a savings account, credit card, or any kind of loan, then you have buying power as a consumer and you can shop around for rates.

“There’s lots of competition. I think all of these markets are somewhat good if you’re borrowing,” says Tendayi Kapfidze, chief economist at LendingTree.com, an online loan marketplace.

If your main concern is saving and historic low rates are the last thing you want, there are also ways you can shop around and rethink your income-oriented investment strategies.

Here’s how interest rates could affect your key personal finance categories in 2021.

Mortgage loans

High demand and low supply have been driving up housing prices, and both of those factors have only been exacerbated by the COVID-19 pandemic. People quarantined in cities have been desperate to move and interest rates averaging below 3% for a 30-year fixed mortgage make the prospect enticing. You may also be considering refinancing if you can get a lower rate but aren’t sure how long you’ll stay in your current home, given the uncertainty in the world.

The Mortgage Bankers Association, for one, forecasts that rates will remain steady and end up only as high as 3.2% for a 30-year fixed rate mortgage by the end of 2021.* Jurrien Timmer, Fidelity’s head of global macro, says the Federal Reserve could counter a rise in mortgage yields. “The Fed would probably lean into that because they want to keep those costs as low as possible,” Timmer says.

The best thing to do? Make some calls or go to an online loan marketplace and get real-time pricing information on your options. If you can drop your rate by half a percent or more, it might be worth it, depending on the fees and your overall financial picture. “Don’t negotiate against yourself,” says Kapfidze. “The best thing you can do is talk to a lender or shop around and have a professional tell you what your prospects for rates are.”

Credit cards

Small shifts in interest rates won’t change your credit card payments much. If the Fed raises its federal funds rate a quarter of a point—a typical bump when rates are on the rise—your credit card interest rate will also probably go up. But even if you owed $10,000, that would only shift your monthly interest payment by a couple of dollars.

There are other dynamics going on in the credit card marketplace that could matter more to you. For one thing, credit card issuers have been trying a lot of different tactics to entice consumers because of changing spending habits during the pandemic. You may be able to shop around and find an offer that suits your needs, such as discounts on takeout and delivery services, groceries, and all sorts of other non-travel rewards. “The issuers have thrown an awful lot of spaghetti against the wall, seeing what cardholders want now,” says Matt Schulz, chief credit analyst at LendingTree.

You may also want to consider suspending or downgrading travel rewards cards that you don’t foresee using much in 2021. You may be able to avoid the fee or replace the card with one that has cash-back rewards and no annual fee. “It never hurts to ask, especially now, when banks want to hold onto good customers,” says Schulz.

Your best option for action on your credit cards may be to take advantage of low interest rates and high savings rates to pay down debt and keep it gone.

Student loans

The market for student loans is split into federal and private lenders, but borrowers need to consider a lot more than just the basic interest rate before taking any actions in 2021. For one thing, some kind of relief for federal student borrowers may be on the way in the new Joe Biden administration, but the ultimate substance of a program is unclear, and may remain unclear for some time to come.

Borrowers considering other actions, like forbearance, need to consider their overall financial picture. Forbearance typically allows you to delay payments for a period, but the principal gets tacked onto the back end of the loan. “It makes your debt bigger in the long run,” says Emsbo-Mattingly.

For those shopping rates on refinancing private loans, the overall economic conditions in the US could affect lending. If borrowers start defaulting on loans in big numbers, opportunities might dry up, as the rates you are charged are not just a reflection of prevailing market rates but also confidence that loans can and will be paid back. “If lenders get more concerned about credit quality, you'll see lending standards tightening,” says Kapfidze.

Car loans

The car loan market for both new and used car purchases is similar to the mortgage market in that interest rates are low by historical standards, there’s plenty of competition, and there has been a surge in demand, especially for used cars, while supply has been low. Your individual financing offer will depend on a lot of factors—from the car particulars to your credit history and current income—so the options will range from incentive pricing at 0% up to 5%, and beyond.

“The key to maximizing your benefit is taking advantage of competition by talking to multiple folks and making them bid for your business,” says Kapfidze.

Savings

What’s good for borrowers is not necessarily good for savers, as interest rates on savings accounts have fallen to around 0.5% from a recent peak of close to 3%, even though the Fed hasn’t moved its rates since last March.

For retirees and others, not having good returns on cash savings can be a big blow if they are trying not to consume the principal of their nest egg. As rates go down, your income stream from dividends and interest goes down too. That makes it important to budget your retirement income needs, and also be careful with your cash allocations in your overall portfolio strategy.

“There will be bumps in the road,” says Embso-Mattingly. “This coming year, we could have the saving rate fall and the spending rate go up, and we’ll see how much the markets test the Fed’s willingness to intervene.”

One option to consider is using your cash reserves that aren’t needed for an emergency fund or a specific savings goal to pay down debt. That way, if interest rates rise again, you could be in a much better place financially.

Bottom line

The start of a new year is always a good time to look at your overall financial picture and see where you need to make adjustments. Part of this should be reviewing all of your debt and the interest rates you pay on it. There’s help available from financial professionals and online calculators to pinpoint your needs and figure out your best strategies.