Each depositor insured to at least $250,000 per insured bank

Winter 2010/2011

Why Interest Rates Matter to You
Position your finances for a changing environment

Wondering how long interest rates will stay low? The Federal Reserve has kept short-term borrowing rates near zero since late 2008 to stimulate lending and help the economy recover. Rates will head up as the economy gains steam, but exactly when is still uncertain. Now is a good time to assess how changes in interest rates may affect your savings and borrowing plans.

Keep your savings goals on track. While today's low interest rates on deposits may dampen your desire to save, it's essential to stay focused on your goals. "Savings are the best way to protect yourself against unexpected expenses and build your wealth," said Richard A. Brown, the FDIC's Chief Economist. "The power of compound interest, which lets you earn interest on interest, will help your savings grow even faster."

Choose savings products that fit your needs. Various financial publications and Web sites can help you shop for the best deposit rates on CDs (certificates of deposit) and other savings accounts. But be sure you are comfortable with all the terms before you invest. "Although choosing the highest CD rate can be tempting, paying a penalty to withdraw your money early could be costly," said Philip Shively, Chief of FDIC's Economic Analysis Section.

A CD laddering approach — in which your savings are divided into several CDs with differing maturities — is a good way to combine the higher rates of a long-term CD with the access to funds provided by a shorter-term CD. Laddering can also help you navigate a changing rate environment.

For example, suppose interest rates are expected to rise. Using a laddering strategy, the CD with the shortest remaining maturity will reinvest into a new, long-term CD at the new, higher interest rate. By contrast, if you deposited all your funds in one long-term CD, you could be locked in at the current rate even if rates rise (unless you choose to pay an early withdrawal penalty).

For additional guidance on buying a CD, see Shopping for a CD: Be Informed, Be Safe.

Lower your borrowing costs. Take advantage of today's historically low rates to tackle high-interest debt on your credit card, mortgage or any other loans. One of the first areas to target is credit cards. "If you must carry a balance from month to month, try requesting a lower rate from your credit card company," said Christopher Newbury, Associate Director of FDIC's Risk Analysis Branch.

If you are thinking about buying a home, consider locking in a fixed-rate mortgage at today's low rates. Doing so will protect you from future increases in interest rates. For more information, see Looking for the Best Mortgage.

And if you already have a mortgage, this could be an opportunity to refinance at lower rates, especially if you have an adjustable rate mortgage. "Make sure you compare the savings with the costs to refinance," Newbury advised, "to make sure it will save you money."