With inflation topping 7% and consumer confidence at a 10-year low, it’s a foregone conclusion that the Federal Reserve will raise the federal funds rate in the near future. It could be at their meeting in March, or it could come even sooner at an emergency meeting, but it’s coming. The first hike is likely to be followed by a series of increases that could raise the fed rate from its current, .08% level to 1.6% or higher by the end of 2023. That would mean banks’ prime interest rate (the best rate they will lend money) would likely end up around 4.6%.
The rate change will hit credit card interest rates, home equity lines of credit, and other kinds of variable-interest debt most directly, because those rates are based on banks’ prime rate, which largely moves in tandem with the Fed’s rate. Other kinds of loans—mortgages, car loans, etc.—have different influencers that affect their interest rates, but the ripple effect from a rate hike would likely raise the cost of all borrowing.
Here are some things for consumers to consider in order to prepare for the higher interest rates the near future will bring.
Don’t worry: Rising interest rates are not (necessarily) a bad thing. “From an investment standpoint, interest rates go up when the economy is typically going well,” Daniel Milan, managing partner of Cornerstone Financial Services told CNBC. “People are spending…if you look at it from a different lens, this means some positive things are happening.”
Call your credit card company and ask for a lower rate: According to a survey from CreditCards.com, 84% of the time, people were able to lower their credit card interest rate just by calling their issuer and asking. Now is a good time to make this call.
“If you get the rate reduced, it’ll be by a good bit more than the one-quarter of a percentage point the Fed is going to raise its rates, so you’ll come out ahead,” Matt Schulz, chief credit analyst at LendingTree, told CBS.
Refinance your home loan: While mortgage interest rates aren’t tied to the prime rate directly, that doesn’t mean they aren’t going up, too. According to Freddie Mac’s data, 30-year mortgage rates have risen from 2.73% a year ago to 3.69% last week. This is still a historically low rate, but many economists expect it to go further up in the coming months. A survey from Zillow indicated that around 78% of American households did not refinance their homes last year. If you are eligible for a re-fi, you should consider putting it in motion now.
Make a large purchase: If you are planning to make a major purchase using credit, it might be a good idea to pull the trigger now and lock in a lower interest rates, provided it’s fixed. Prices are likely to keep going up for a bit anyway, so even spending cash makes sense. Borrowing money for a yacht, a car, or that second home you’ve had your eye on might prove more expensive if you buy it in a few months then if you buy it now, Mr. Moneybags.
Consolidate your debt: If you’re like me, and you’re thinking more about how to best manage credit card debt than whether it’s a good time to buy a boat, you should look into whether a debt consolidation loan would make sense for you, and try to lock it in before rates rise. You might also consider rolling your debt into a balance transfer credit card before those rates go up, as well.
Refinance student loans: It’s a particularly good time for people with student loans. Payments and interest on federal student loans are paused until May 1, and more federal relief might be coming (probably not, but you never know). If you paid for school with with private loans, student loan refinance rates have been at or near all-time lows recently. Consider taking advantage of these lower rates while they are available.
Consult a financial advisor about your portfolio: Most financial experts generally advise consumers with 401(k)s or IRAs to invest for longterm growth and leave their funds alone, but now is good time to review the details of your portfolio, and discuss any concerns, questions, or potential changes with a professional financial advisor.