When Will Interest Rates Go Up?

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Interest rates have reached record lows for many types of credit since the Federal Open Market Committee (FOMC), a committee within the Federal Reserve, slashed interest rates to near zero in March 2020.

But as the U.S. economy has rebounded and inflation has spiked, many experts wonder when the FOMC will increase interest rates. Here's what you should know and how it might impact you.

When Will the Fed Raise Interest Rates?

It's still unclear exactly when the FOMC will increase the federal funds rate—the rate at which banks borrow and lend to each other to meet overnight reserve requirements. But after the latest meeting of the committee in September, half of the 18 officials said they expect to raise interest rates by the end of 2022. That's a change from the committee's meeting in March of this year, when most officials said they didn't expect to see any rate increases until 2024.

The federal funds rate is important to consumers because short-term interest rates on loans and credit cards typically rise and fall with the federal funds rate. Changes in this rate also can create stock market fluctuations, which can affect stocks and funds held in retirement accounts and other investments.

How Fed Interest Rate Changes Affect Your Accounts

Many lenders use what's known as the prime rate to benchmark their interest rates, and that rate is impacted by the federal funds rate. Depending on the type of credit you have, though, it may or may not impact you.

  • Credit cards: Most credit cards have variable APRs, meaning they can change depending on various factors. A higher federal funds rate could result in a higher APR for both new and existing cardholders.
  • Personal loans: Most personal loans charge fixed interest rates, so you don't have to worry about your rate increasing on an existing loan. If you apply for a new one, however, it'll likely come with a higher rate if the prime rate has increased. If you happen to have a variable-rate personal loan, your rate could go up with market rates.
  • Auto loans: Auto loans typically have a fixed interest rate, so existing loans won't see increased rates. However, new loans may cost more.
  • Home equity loans and lines of credit (HELOCs): While home equity loans typically have a fixed interest rate, HELOCs tend to have variable rates. That said, some HELOCs allow you to convert some or all of your balance to a fixed-rate installment loan, which can be a good way to escape future increases.
  • Mortgage loans: Fixed mortgage rates aren't directly impacted by the federal funds rate. Factors that influence these rates include the 10-year Treasury rate, inflation, and supply and demand. So whether you currently have a home loan with a fixed rate or plan to apply for one, a Fed rate hike won't come into play, at least not directly. However, adjustable-rate mortgage (ARM) loans do have interest rates that fluctuate on a short-term basis, so they are impacted by the federal funds rate. If the rate increases, so will your ARM rate.

The federal funds rate also impacts your savings account interest rate. If you have a high-yield savings account, for example, you can expect your interest rate to increase as the Fed hikes its interest rate.

How to Get a Low Interest Rate

If you're concerned about rising interest rates, you can take some steps to increase your chances of securing a low rate on your loans:

  • Improve your credit. Building and establishing a good credit score can make it easier to qualify for lower rates across the board.
  • Shop around. It's crucial to compare interest rates and other features from multiple lenders before you pull the trigger, no matter what type of credit you're seeking. Each lender has its own range of rates and criteria for determining which rate to charge you. Shopping around will help you get the best deal available.
  • Get a fixed-rate loan. If you're thinking about applying for a private student loan or a mortgage, you'll notice that variable interest rates typically start off lower than fixed rates. If you opt for the fixed rate anyway, you'll likely be pleased with your decision as market interest rates go up and yours stays the same.
  • Make a larger down payment. If you're applying for a loan to help you buy a car or a home, a bigger down payment often results in a lower interest rate because it shows that you have skin in the game and it also reduces how much you have to borrow. In both cases, you're presenting less risk to the lender.
  • Opt for a shorter repayment period. In a market where interest rates are expected to rise, a long repayment term means that the lender must wait longer to recoup the loan amount and lend it to someone else at a higher rate. As a result, lenders typically charge higher rates on long repayment periods to help make up for that risk. If you can afford a shorter repayment term, take it.

Also look for opportunities to limit the actual interest charges you pay. If you have a credit card, paying your bill on time and in full every month will result in no interest charges at all. And if you have high-interest installment loans, paying off the debt early will save you money.

Just watch out for prepayment penalties on some installment loans, and think twice about sacrificing other important financial goals to pay off low-interest debts.

Monitor Your Credit to Maintain a Good Credit Score

Whether you're working on improving your credit or you've already achieved your goal, it's important to keep track of your progress. Experian's free credit monitoring tool offers access to your FICO® Score and Experian credit report. You'll also get real-time alerts when changes are made to your credit report, making it easier to address potential issues as they come up and also protect yourself from identity thieves.

While having good credit isn't the only way to ensure low interest rates, it can help you qualify for the best rates available regardless of how the market is doing.

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