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In an effort to combat inflation, the Federal Reserve has raised interest rates by a quarter point to a range of between .25% and .5%. This interest rate hike, the first since 2018, is one of seven planned interest rate increases in 2022.
So what does that actually mean for your finances? Let’s take a look at how this turn of events could impact your financial situation and investment strategy.
How an Interest Rate Hike Will Impact Your Finances
When the Federal Reserve raises interest rates, banks and lenders respond in turn. Here’s where you may notice higher rates:
Credit Cards
Credit card interest rates are often changing based on what’s happening in the market. And if the Fed increases interest rates, then credit card providers will likely raise their rates in turn. However, this will only impact consumers who carry a credit card balance. If you have a credit card and pay off your statement balance every month, then nothing will really change for you.
But if you have credit card debt, then you may find yourself owing more interest every month until you can pay off the balance.
To mitigate this increase, you can transfer debt to a balance transfer card with a special 0% APR offer. These offers usually last between 12 and 24 months, depending on the card provider.
During that period of time, you will not be charged any interest on the balance as long as you make the minimum payment every month. If you can try to pay off all or most of the balance before the 0% APR offer ends, you could save hundreds in total interest. Most card companies charge a 3% balance transfer fee, so make sure you can pay off the bulk of the balance or you won’t end up saving much money.
If you don’t qualify for a 0% APR offer, you can also call the credit card provider and ask them for a lower interest rate. Remind the card provider that you’ve been a responsible customer and ask if they can lower your interest rate. Repeat this process for every card that you hold a balance with.
Savings Accounts
The interest rate on a savings account is dependent on external market factors. When the Covid-19 pandemic began and the Federal Reserve slashed interest rates, rates on savings accounts also fell. Now that the Federal Reserve is raising rates, you may notice that the interest rate on your savings account will also go up.
The difference may be minimal since the Fed is not substantially increasing interest rates. Keep an eye on your savings account for the next couple of months and see if your rate changes.
Banks increase savings rates on their own schedule. If you don’t notice a change in your savings account, look at competing banks and see if their rates are higher. If they are, it may be worth transferring your money and opening a new account.
Variable-Rate Loans
A variable-rate loan is a loan with an interest rate that changes throughout the loan term. There are many types of loans that can have variable interest rates, including mortgages, personal loans, student loans, auto loans and more.
When the Federal Reserve increases interest rates, lenders will also increase the interest rate on a variable-rate loan. The increase may not happen right away, depending on your loan’s terms and conditions. For example, some lenders only change the interest rate once a year, while others change it once a quarter or even once a month.
If you’re not sure whether you have a variable-rate loan, contact your lender’s customer service department and ask. You can also view your original loan documents, which will state the kind of interest rate you have.
If you do have a variable-rate loan, you can also contact the lender and ask them when your interest rate will change and what the new rate will be. Knowing this in advance can help you budget for the increase.
If you can’t afford the price increase, you can consider refinancing the loan to a fixed interest rate. If you really want a lower monthly payment, choose a longer-term loan when you refinance to end up with lower monthly payments.
Interest Rates for New Loans
If you’ve been thinking about applying for a loan like a mortgage, personal loan or auto loan, you may find yourself paying a higher interest rate now than if you would have applied a month ago. Borrowers who already have loans will also see higher interest rates if they try to refinance now.
Interest rates are still relatively low, however, even if they’re not as low as they were a month ago. And rates are only likely to increase in the future. If you’ve been thinking about taking out a new loan or refinancing an existing one, it may be better to act now instead of waiting for rates to go back down.
Investments
Rising interest rates may or may not correlate to a rise in the stock market and other investments. That’s because the stock market is affected by many other factors, including unemployment figures, current events, the economic forecast and more.
Generally, when the Fed raises rates, it may be a sign that the economy is improving. This can lead to a subsequent uptick in the stock market. But the Russian invasion of Ukraine has had a significant negative impact on the stock market, so it’s hard to say what effect higher interest rates will have.
Remember, you shouldn’t feel the need to change your investment approach based on rising interest rates. Keep your strategy the same and talk to a financial planner if you’re worried.
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Zina Kumok (167 Posts)
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.
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