The Fed raised interest rates by 0.25% for the first time since 2018. As if that weren’t enough, the organization expects to bombard us with six more rate hikes over the course of the year.
But why?
As you must have heard inflation is currently at its highest level in 40 yearswhich makes everything from food to gas more expensive.
Raising interest rates could help bring things back to normal by making loans more expensive and forcing people to cut back on spending.
Less spending equals less demand. And less demand leads to a more relaxed supply chain, which means lower prices for just about everything.
So, even if it’s a bit confusing, higher interest rates are kind of a necessary evil to make our economy stable again. But what exactly does this mean for your student loan, car loan, credit card debt, savings, and IRA? That’s what we’re here to answer.
If you have credit card debt…
Because most credit cards have floating interest rates, which means they can fluctuate based on market conditions — Robert Heumann, Chief Revenue Officer at Crediblesays that if you have a balance, your debt as well as your monthly bill will likely become more expensive in the following months.
This is because most lenders use the federal funds rate as a benchmark for setting their own interest rates.
“Typically, when this rate goes up, you’ll see other interest rates go up, including credit card interest rates,” Humann says.
However, before raising interest rates, Humann says your credit card company must give you 45 days’ notice of these changes so you can prepare your pocket for what’s to come.
“If you’re struggling with high-interest credit card debt, paying it off with a fixed-rate personal loan can save you money in the long run,” says Humann.
He makes an excellent point.
The current APR for new credit card offerings is 19.62%. CreditTreelatest reporttill personal loans from creditors as lightstream can provide you with a fixed annual interest rate of just 2.99%, depending on your loan.
You can also pay off your credit card debt faster and avoid additional interest by using credit card balance transfer.
While you’ll need excellent credit to get the 0% introductory offer, you can get anywhere from 12 to 21 months to pay off your balance without interest.
More: Best Credit Cards for Balance Transfer
If you have student loans…
If you have federal student loans, rejoice (at least a little). The Fed’s interest rate hike won’t actually affect your loans or how much you’ll pay each month because these loans have a fixed interest rate. So you can sleep well.
The problem, however, is if you have private variable rate student loans.
“It is likely that people with current variable-rate private student loans will see some increase in their interest rates due to the federal funds rate hike,” Humann says.
“If you have a variable rate loan product, such as a student loan or mortgage, you can protect yourself from further rate hikes by refinancing into a fixed rate product.”
But floating rate student loan refinancing only makes sense if your credit score and income have improved significantly since you first got a loan. Otherwise, you won’t be able to secure the best terms or rates available, and there’s no point in going through all the refinancing trials.
More: Should You Worry About Inflation If You Have Student Loans?
If you have a mortgage or are planning to buy a house…
If you’re one of the lucky ones who already owns a home with a fixed-rate mortgage, you won’t be adversely affected by higher interest rates. In fact, everything is exactly the opposite. As things get more expensive, the value of your home can increase, giving you more capital.
But if you have adjustable rate mortgage which is already adjusting, perhaps now is the time to consider refinancing your mortgage to lock in a fixed rate.
However, as with student loans, refinancing will only make sense if your credit and income have improved and you can get a lower rate than what you currently have. However, this last part can be difficult – even with an excellent reputation – because mortgage rates are rising rapidly and is expected to continue to rise throughout the year.
If you’re looking for a new home, Brendan McKay, president of Broker Advocacy at the Association of Independent Mortgage Experts, says higher interest rates “mean the home you end up owning will be more expensive. ”
McKay also points out that another disadvantage for potential homeowners is that higher interest rates can also affect how much housing they can afford.
“Most loan officers pre-approve sales prices, as that’s how people look for homes, but it all depends on the payment you’re eligible for,” McKay says. “So if you were previously eligible for $3,000 a month, your loan officer might say you qualify for a $550,000 house, but now that $3,000 a month can only earn you $500,000.”
If you have a car loan or want to buy a car…
As with the other fixed rate loan products discussed on this list, if you already have an auto loan, you don’t have to worry about any changes in the annual interest rate or monthly payment.
Similarly, if you are planning buy a car, an increase in the interest rate will not have a significant impact on the amount you will pay each month, since other factors affect the interest rate on a car loan. These include your credit score, income, assets, debts, and whether you are trying to fund a new or used model.
So, if you’re looking for a new ride, the best way to save money is to compare offers before you buy.
More: Car buying guide: how to buy a car and save on your trip
What about savings, stocks and other investments?
When it comes to your savings accountin the near future certificates of deposit (CD)and return on cash investments, Amy Lynn Richardson, CFP with Schwab Smart Portfoliossays there is good news as yields tend to rise with the federal funds rate.
More: Comparison of the best high yield savings accounts
In addition, she notes that financial stocks (owned by banks and other financial institutions) also tend to “be supported by higher interest rates.”
As for other investments, it’s best to remember that investing is more about long-term success than short-term wins.
“No one knows exactly what will happen to interest rates, inflation and a host of other factors that affect the markets,” says Richardson. “For most investors, the best approach to long-term success is broad diversification, consistent with their risk tolerance. That way you don’t put all your eggs in one basket.”
If you are not sure how to properly diversify your portfolio, the best thing you can do is consult with a financial planner to develop an effective investment strategy. You can also invest with Robo advisorwho can do all the hard work for you at a reasonable price.
More: Best Roo Expert Advisors of 2022
essence
When it comes to raising interest rates, there are both winners and losers. The best thing you can do to protect your wallet is to cut costs where possible, gravitate toward fixed rate products if you need to borrow, and avoid variable rates.
Featured image: Andrey Yalansky/Shutterstock.com