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Ways Higher Interest Rates Might Impact Your Finances

  • May 4, 2022

In Los Angeles County, higher prices at the grocery store and gasoline pump have consumers disgruntled and economists talking about inflation. When unemployment spiked and industry slowed during the COVID-19 pandemic, the Federal Reserve lowered interest rates to make borrowing money more affordable and encourage spending for both consumers and businesses.

Now that the pandemic is waning, many people have gone back to work and businesses are manufacturing goods and providing services at a higher rate. In order to combat inflation and encourage a healthy economic recovery, the Federal Reserve is stepping in to raise interest rates and slow spending.

A higher interest rate makes borrowing money more expensive but can affect more than just the rate on a loan. At SkyOne Federal Credit Union, navigating interest rate changes doesn’t have to be stressful. We’re here to explain what you can expect from interest rates this year and how to safeguard your personal finances during the rate hike.

When the Federal Reserve raises interest rates, you can expect to see higher mortgage rates and higher interest rates on savings accounts.

What is an Interest Rate Increase and How Much Will It Go Up?

When you hear that the Federal Reserve has changed the interest rate, the announcement really means that they’ve changed the federal funds rate. The fed funds rate is the interest rate that banks charge each other to borrow money in short-term loans. Any subsequent change to personal loan rates, credit card interest rates, or savings rates are a reaction to the change in the federal fund rate.

On March 16th, the Federal Reserve raised the current federal interest rate by 0.25 percent. While this is a small bump, analysts believe the Fed could raise the interest rate as many as six more times in 2022. By raising it in small increments, the Federal Reserve can monitor the effect on the economy and avoid shocking the system all at once. The goal is to find a balance between inflation and recession.

How Interest Rate Increases Can Impact Your Finances

While the goal of federal interest rate increases is to influence the economy as a whole, it’s important to consider how an interest rate hike will affect your personal finances. Higher interest rates aim to slow spending, so you can expect changes to banking products that reflect this objective.

 “Many economists predict that the Federal Reserve will raise interest rates at least three times in 2022, and at a faster pace than originally expected.” Source: massmutual.com

The Return on Your Savings Will Increase – As the federal funds rate increases, banks will begin to offer higher interest rates on savings accounts and certificates of deposit. Interest rates for savings accounts have been discouragingly low for the last few years. With an increase in the federal interest rate, you should begin to see a greater return on the money you have put away in savings. This will be especially beneficial if you are close to retirement and have a large amount of money set aside in savings.

New Loans and Existing Variable Rate Loans Will Cost More – New loans will reflect increased federal interest rates. You will pay more money in interest over the life of a new auto loan, home equity loan, HELOC, or personal loan than you would have in past years. If you currently have a variable interest rate loan, expect the interest rate on that loan to increase as well.

Mortgage Rates Will Go Up – Mortgage rates are not directly impacted by the federal funds rate; they are influenced by the 10 year treasury yield. Nevertheless, you can expect new mortgage rates to climb throughout the course of the year. Prior to the March 16th federal interest rate hike, mortgage rates had already increased to 3.85 percent for a 30 year fixed rate mortgage. If you currently have an adjustable-rate mortgage (ARM) on your home, it may be a good time to refinance. Locking in a fixed-rate mortgage before rates increase again will save you money over the life of your home loan.

You Will Pay More on Credit Card Debt – Most credit cards operate with a variable interest rate. Since the federal funds rate has increased, so will your minimum payment and the amount of interest you pay on any revolving credit card balances. At the end of March, the average APR on a new credit card was 19.62 percent. Financial experts typically advise you to limit the amount of debt you carry on high-interest credit cards, and this advice is reiterated now that rates are rising.

The Stock Market May Dip – Increases in federal interest rates do not directly affect the stock market like they do banking products. Generally speaking, you should not see any implications to your long-term holdings because of the changing interest rate. Some investors may sell during this time, lowering stock prices in the short run. This effect is a consequence of investor psychology as some traders fear the worst and take a defensive stance against possible economic changes.

Credit cards and revolving debt are heavily affected by interest rate increases – Pay down debt as much as you can before interest rates rise.

How To Prepare Your Finances for Interest Rate Increases

The Federal Reserve is expected to raise interest rates multiple times throughout the year. Plan ahead and come out on top of rising interest rates by making these changes to your financial products.

  1. Pay down credit card debt. With an increase in APR, it’s more important than ever to aggressively pay down any credit card balances you carry.
  2. Refinance your adjustable-rate mortgage. Lock in a fixed mortgage rate now to prevent increases in your monthly mortgage payments.
  3. Improve your credit score. By reducing debt, increasing your available credit, and making on-time payments you can bring up your credit score and pave the way for lower interest rates if you need a loan in the future.
  4. Pull the trigger on an upcoming large purchase. If you know you will need a new car or home in the near future, go ahead and buy now before interest rates rise even more. Even though prices are high, waiting a few months may cost you thousands in long-term interest.
  5. Shop for high yield savings accounts. Keep an eye out for higher interest rates on savings accounts and certificate accounts, and tuck some money away to capitalize on increased rates.
  6. Initiate a zero percent APR balance transfer. If you can’t pay off your credit cards, try to qualify for a new card offering 0% APR on balance transfers. This will buy you some time to pay off your debt without accruing more interest.
  7. Tighten up your budget. With prices sky-high and loan rates increasing, now is a great time to slow your spending and make sure you are saving for the future.

Refinancing an existing adjustable-rate loan to a fixed-rate loan before interest rate hikes will lock in the current rate and save you money.

Navigate Higher Interest Rates with Ease

At SkyOne, we pride ourselves on helping Southern California weather the highs and lows of the economy with credit union financial planning. Need to refinance your mortgage or existing loan? Our local lending team can find the best loan for your needs. If you have questions regarding your financial portfolio, our wealth management services can help. Schedule a consultation with SkyOne’s Wealth Management Team today.

If you’re ready to take advantage of rising savings rates, SkyOne is here with the best savings account rates. The best online savings account can help you take advantage of new rates and save for the future. Check out our Sky-High savings account and certificate accounts. Open your new account online today! For new members only, use promo code “JOIN” and earn $25. For existing members, tell a friend about SkyOne, and you’ll BOTH get a $25 Amazon.com Gift Card.

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