Here’s How You Can Prepare If the Fed Increases Rates by 50 Basis Points

Consumers are spending more to keep up with the rising cost of living and it may get worse before it gets better.

“Even though wage growth has been the best in decades, household costs have increased,” said Greg McBride, chief financial analyst at Bankrate.com. “With inflation at 40-year highs, that worries everyone.”

After the Federal Reserve raised interest rates for the first time in more than three years, Chairman Jerome Powell vowed tougher action on inflation, which he said threatens an otherwise strong economic recovery.

They have to hold on and they’re not going to do that with baby steps.

Greg McBride

Chief Financial Analyst at Bankrate.com

It is now expected that the central bank will increase rates by half a percentage point in its meeting this week.

“The Fed is behind the curve, they have to catch up and they’re not going to do it with baby steps,” McBride said.

The move would be in line with a hike in the prime rate and immediately raise financing costs for many forms of consumer lending.

where interest rates will rise

Consumers will see their short-term lending rates, especially on credit cards, among the first to jump.

Since most credit cards have a variable rate, a direct link to the Fed’s benchmark, your annual percentage rate will increase with each move by the Fed, usually within a billing cycle or two.

Adjustable-rate mortgages and home equity lines of credit are also linked to the prime rate. Most ARMs are adjusted once a year, but a HELOC is adjusted immediately.

Because 15-year and 30-year mortgage rates are fixed and linked to Treasury yields and the economy, homeowners will not be immediately affected by the rate hike. However, anyone buying a new home is already going to pay more for their next home loan (the same goes for car buyers and student loan borrowers).

“Projected increases have already been built into mortgage rates,” said Holden Lewis, home and mortgage specialist at NerdWallet.

The average interest rate for 30-year fixed-rate mortgages rose to 5.37% last week, the highest since 2009 and is also expected to continue at higher levels throughout the year.

Here are three ways to stay ahead of rising rates.

1. Pay off debt

As rates rise, the best thing you can do is pay off the debt before the big interest payments drag you down.

Christopher Jones, chief investment officer at Edelman Financial Engine, said that when you look at the loans that you owe, you can pay off the higher interest rate debt first — and “credit cards are by far the most.” ”

In fact, credit card rates are currently just over 16%, significantly higher than almost every other consumer loan and could go up to 18.5% by the end of the year—which would be an all-time record, according to Ted Rossman. , a senior industry analyst at CreditCards.com.

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If you have a balance, try calling your card issuer asking for a lower rate, consolidating and paying off a high-interest credit card with a low-interest home equity loan or personal loan, or interest-free balance transfer credit. Switch on the card.

“Zero-percent balance transfer cards are alive and well,” Rossman said, adding that card transfers offering 15, 18 and even 21 months without interest on “hundreds, maybe thousands of dollars of interest.” It’s a great way to save.”

2. Find a Better Savings Rate

While the Fed has no direct effect on deposit rates, they do correlate with changes in the target federal funds rate. As a result, savings account rates at some of the largest retail banks are hovering near rock bottom, currently averaging 0.06%.

Because the rate of inflation is much higher than it is now, any money in savings loses purchasing power over time.

“The worst-case scenario is when your borrowing costs go up, but you’re not getting the benefits of a higher savings rate,” said Yiming Ma, assistant finance professor at Columbia University Business School.

Thanks, in part, to reduced overhead expenses, the average online savings account rate is often higher than the traditional, brick-and-mortar bank rate.

Meanwhile, top-yield CD rates average more than 1% — even better than a high-yield savings account.

CDs with the highest returns generally have higher minimum deposit requirements than an online savings account and require longer periods to maturity. This means money is not as accessible as it is in a savings account.

“You don’t put money in emergency savings for the potential for great returns,” McBride said. “It’s a buffer between you and 17% of credit card debt when an unplanned expense occurs.”

However, “if you have extra savings, think about deposits that can be set aside,” Ma said. “Now is the time to use that increase in rates.”

3. Raise Your Credit Score

As a general rule, the higher your credit score, the better your situation.

Borrowers with good or excellent credit (generally anything above 700 or 760 respectively) will qualify for lower rates and this will go a long way as the cost of financing goes down.

For example, according to Francis Creighton, president and CEO of the Consumer Data Industry Association, taking a percentage point off a new auto loan can save up to $50 per month.

On a 30-year mortgage, snagging even a slightly better rate can mean monthly savings in the hundreds.

“For anyone trying to make ends meet, that’s real money,” Creighton said.

The best way to increase your credit score is to pay your bills on time or reduce your credit-card balance, but there are even simple fixes that can have an immediate effect, such as errors. To check your credit report, Creighton advises.

,You want to go through a period of inflation in the strongest position you can be in.,

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