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In this article:
- 1. Interest Rate Hikes Can Help Curb Inflation
- 2. The Cost of Credit Card Debt Will Increase
- 3. Your Mortgage Payment May Go Up
- 4. Other Loans Will Get More Expensive
- 5. New Borrowing May Be Costlier
- 6. The Return on Your Savings Account Will Improve
- 7. The Stock Market May Sag
- 8. Housing Price Increases Will Continue to Slow
The Federal Reserve continues to increase its federal funds rate nearly three years after slashing it to near zero in March 2020. After seven rate hikes in 2022, the Federal Open Market Committee (FOMC) raised the rate again in February by 0.25% to a range of 4.50% to 4.75%. It's estimated that there will be more hikes throughout 2023.
The federal funds rate is used by banks to charge each other to borrow and lend cash reserves on an overnight basis and directly influences the prime rate, which is what lenders use to determine what rates to charge their customers. It also influences the yield rates banks and credit unions offer on savings accounts, certificates of deposit and more. So an increase in rates can have a direct impact on your finances, almost immediately in some cases.
Here's what you need to know about how the Fed's rate hikes can impact you and your financial well-being.
1. Interest Rate Hikes Can Help Curb Inflation
Inflation is on the minds of many consumers, especially after it hit its highest rate since 1982 in February. The FOMC uses rate increases to help curb inflation because as interest rates rise, consumers tend to spend less, which, in turn, reduces the rate at which the costs of goods and services increase.
While it can take time for rising interest rates to help combat inflation, slowing down the rate of inflation can have a positive impact on your budget in the long run.
2. The Cost of Credit Card Debt Will Increase
Most credit cards have variable interest rates, which change relatively quickly after the federal funds rate and prime rate adjust. If you carry a balance on your credit card, your debt will get more expensive as rates rise, which may also mean a higher minimum monthly payment. Additionally, it may take you longer to pay down your debt.
If you can, try to prioritize paying down your credit card debt and paying in full every month going forward to avoid interest charges.
3. Your Mortgage Payment May Go Up
Adjustable-rate mortgages (ARMs) only make up about 4% of all mortgage loans, so most homeowners won't see a change in their loan payment because they have fixed interest rates.
If you do have an ARM and you're past the initial fixed period, you may see your mortgage rate increase, along with your monthly payment. Most ARMs adjust interest rates yearly, though, so check with your lender or loan servicer to find out when to expect a rate change.
Depending on the situation, you may consider refinancing the loan into a fixed-rate loan to avoid further rate increases.
4. Other Loans Will Get More Expensive
Federal student loans and most private student loans have fixed interest rates, but many private lenders also offer variable rates. If you have a variable-rate private student loan, your rate may adjust monthly, quarterly or annually. Check with your lender to find out when to expect a change and consider refinancing to convert your variable rate to a fixed one.
Additionally, personal lines of credit and home equity lines of credit (HELOCs) tend to charge variable interest rates, which can fluctuate regularly. If you have the option to convert some or all of your balance into a fixed-rate loan, now may be a good time to take advantage of that option.
5. New Borrowing May Be Costlier
If you're thinking about applying for a new credit card, financing a car with an auto loan or taking out a personal loan or student loan, you may find higher interest rates than you did a year ago. Be sure to shop around and compare lenders to ensure that you get the least expensive option.
While mortgage interest rates aren't directly impacted by the Fed rate hikes, they have already begun a rapid increase, so keep that in mind if you plan to apply for a mortgage in the months ahead. Making sure your credit is mortgage-ready will help you get the best rate possible on your loan, even if the rate is higher than it would have been in recent months.
If you're thinking about borrowing money, run the numbers to make sure that you can afford the monthly payments taking the higher rates into consideration.
6. The Return on Your Savings Account Will Improve
While the federal funds rate can have a negative impact on your budget via higher loan interest rates, it can also put a little extra money in your pocket through higher rates on deposit accounts.
For example, you may see increased yields on certificates of deposit, high-yield savings accounts and money market accounts. Unfortunately, not all banks raise deposit rates, so you may want to consider shopping around for a high-yield savings account.
7. The Stock Market May Sag
As interest rates rise, consumers typically have less money to spend because they're paying more in interest. This can have the positive effect of reducing the inflation rate, but it also means lower revenues for companies, which can impact profits. It also costs businesses more money to borrow.
Both of these factors can result in sagging earnings and stock prices, which can impact your investment portfolio in the short term. That said, it can also create an opportunity to take advantage of lower stock prices to improve your long-term return.
8. Housing Price Increases Will Continue to Slow
While the FOMC's rate hikes don't directly affect mortgage rates, the inflationary environment that the Fed is trying to combat does. As mortgage rates have increased significantly in the past few months, the hot housing market of 2021 will continue to cool, with housing prices decelerating somewhat.
If you're planning on buying a house in the near future, prices may not be drastically different from what they are now.
How to Shield Yourself From Rising Interest Rates
While you can't control the economic conditions that have gotten us to this point, there are some steps you can take to try to limit the impact rising interest rates can have on your budget:
- Avoid variable-rate loans.
- Apply for fixed-rate loans before the next rate hike.
- Refinance variable-rate loans into fixed-rate loans.
- Improve your credit score so you can qualify for the best rates lenders have to offer.
- Look at your budget and find ways to cut back on discretionary spending.
- Pay down your credit card balances and make it a goal to pay in full every month.
- Put off borrowing money if you can avoid it.
- If possible, continue to invest and take advantage of lower stock prices.
As you take steps to protect yourself from the impact of rising interest rates, make your credit a priority and monitor your credit regularly to ensure that it's ready for the next time you need to borrow money.