Federal Interest Rates Rise Again: Here's What That Means for Your Finances
If you're a saver, rising interest rates are great news. But if you have debt, you can still minimize the damage to your bottom line.
After years of very low interest rates, the Federal Reserve has been on a rate-rising spree over the past year to help fight inflation. In the latest round, they increased the key interest rate for the eighth time in more than a year, bringing the rate banks pay to borrow money to its highest level in more than a decade.
But that interest-rate hike can also impact regular consumers too—and not always in a positive way. "Rising interest rates have made many Americans rethink things like buying a home, carrying a balance on their credit cards, or getting a new car," says Courtney Alev, consumer financial advocate for Credit Karma. Learn how the new Fed rate hike could help or hurt you, depending on your personal financial picture.
Your savings account could get a nice boost
A low key interest rate means a low interest rate on savings accounts, certificates of deposit (CDs), and money market accounts—which made saving sometimes seem like a sucker's bet for the past several years. (Who wants to keep money in the bank when they're getting less than a percent in interest?)
But many banks are offering more generous rates now, including some banks offering more than 4 percent interest on a savings account—and some CDs topping 5 percent, according to Bankrate.com.
Still, don't expect that your savings rate will rise with every boost the Fed makes. "Savings accounts are only loosely linked to the rates that the Fed sets," says Jill Gonzalez, analyst for WalletHub. "It's basically the banks' decision, and not all of them are willing to do so. Online savings accounts tend to be the exception, as their yields have increased over the past year, though not at the same rate as the Fed increases." In other words, don't expect a .25 percent interest rate hike to match the Federal interest rate.
What you can do: Check the interest rate on any savings accounts you have—including CDs—and consider shopping around for new accounts with better interest rates. (Just keep in mind that the CDs may have a penalty for cashing them in early, so you should factor that amount into your calculations.) Don't stick with a big brick-and-mortar bank—you may have better luck scoring a higher rate online. "Traditional banks don’t always have to offer higher rates to bring in new customers," says Andy Smith, CFP®, CIMA®; executive director of financial planning at Edelman Financial Engines. "They’re not fighting for customers the way that smaller banks, credit unions, or online banks are."
Also, consider your whole financial picture—if you have any debt, you might want to put all your savings toward paying that off pronto.
Credit card debt could get even more expensive
Credit card debt is already subject to some of the highest interest rates around—generally, because it's an unsecured debt (unlike home or car loans, where they can take possession of the house or car if you default). But that means you can expect to see the interest rate on any revolving credit card debt to increase, thanks to this rate hike.
What you can do: "Paying off your credit card debt should be your main focus to avoid paying more and more in interest, essentially overnight, as these hikes continue," Gonzalez says. "Credit cards are most affected by all the Fed rate hikes, so consider doing a balance transfer, or any other type of debt consolidation. Personal loans could also be an option."
Mortgage rates may hold steady (or even continue their decline)
Mortgage rates aren't as closely tied to the Fed rates, so they go up and down based on other factors. The 10-year U.S. Treasury rates play a role, but things like your own credit score and inflation also play a part in the rate you're offered. In fact, despite the recent Fed rate bumps, the mortgage interest rate has been dropping. The benchmark rate for a 30-year fixed rate loan is currently 6.3 percent, according to Bankrate.com.
What you can do: If you have higher-interest debt and a home, you could consider consolidating your debt by refinancing your mortgage. However, you should do that only if you won't be tempted to drive up your credit card debt again as you work to pay off your new mortgage. Bankrate's experts also believe that the mortgage rate will trend lower during 2023, so you may want to hold off until it drops toward 5 percent to make your move.
Adjustable rate loans will be on the rise
Many loans—including home equity loans and lines of credit, student loans, auto loans, and some mortgages—have adjustable rates. And if your interest rate isn't locked in, you may be looking at a rate hike on your next billing statement, depending on how often your interest rate adjusts. (Some adjust on an annual basis, but others may adjust immediately once a new interest rate is announced.)
What you can do: "Know what your current rate is and where you are in your adjustment cycle," Smith says. "Consider moving to a fixed-rate mortgage: shop where you are now, with the adjustable rate and where it’s going with the next increase, against what a fixed-rate product would be."
Smith suggests looking at all of your loan options. You may be able to buy points, which can reduce the interest rate on your loan. "You're paying more now, but your longer-term rate is lower than it would be otherwise." Or, if you can swing it, consider moving to a fixed-rate loan with a shorter loan term, such as moving from a 30-year to a 15-year loan.
The rate hike could affect your investments
While Fed rates impact the entire stock market, it especially impacts bonds. If you have retirement savings or other investments, now's the time to take stock and perhaps make a few key trades to rebalance your portfolio.
What you can do: Smith suggests focusing your review on the bond portion of your investments, which likely took a hit over the past year. "If they’re still quality investments that you want to hold for the long term, now may be the time to rebalance to realign your portfolio," he says. "If you have a lot of dead weight in your bond portfolio, get some help with figuring out what makes sense to hold and what you may want to consider selling."
While inflation has declined, it can still have a major impact on your retirement savings, so consider reviewing your portfolio with your financial advisor to see if you need to make any changes. "Make sure that your long-term retirement plan accounts for and tests against rising interest-rate environments and price inflation," Smith says. "Some stocks may benefit more than others as inflation continues."
You'll want to look at your whole financial picture before you make a big purchase
With the housing market cooling and new incentives to buy electric vehicles or make home improvements, big purchases may be enticing. But unless you have cash on hand, a (very) steady paycheck, or really need to replace a car or repair your house, financial experts suggest you watch and wait.
What you can do: Now's the time to research what you want, so you're ready to buy when the rates decrease—or you've saved up for that big purchase. "This is really the time to be paying down current debts, not incurring new ones," Gonzalez says.
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