What rising interest rates mean for your credit, loans, savings and more

Editor’s note: This is an updated version of a story published on August 26, 2022.

In an effort to curb high inflation, the Federal Reserve on Wednesday Raised Overnight bank lending rates range from 3% to 3.25%.

This was the fifth of six increases by the US central bank months and its third consecutive 75-basis-point rise, which This will put upward pressure on other interest rates throughout the economy.

For consumers, the central bank’s move will once again raise the question of where to park their savings for better returns and how to reduce their borrowing costs.

“Credit card rates are at their highest since 1995, mortgage rates are at their highest since 2008, and auto loan rates are at their highest since 2012. With even more rate hikes on the way, this will further strain the budgets of households with variable rates. loans such as home equity lines of credit and credit cards,” said Greg McBride, chief financial analyst at Bankrate.com. “On a positive note, savers are looking at higher-yielding savings accounts and certificates of deposit at levels last seen in 2009.”

Here are some ways to position your money so you can benefit from rising rates and protect yourself from their downside.

When the overnight bank lending rate — also known as the fed funds rate — rises, the various lending rates that banks offer their customers tend to follow suit.

So you could see your credit card charges go up within a few statements.

Currently, the average credit card rate is 18.16%, up from 16.3% at the beginning of the year, according to Bankrate.com.

Best advice: If you carry a balance on your credit cards — which typically have high variable interest rates — switch them to a zero-rate balance transfer card with zero interest payments between 12 and 21 months.

“It isolates you [future] rate hikes, and it gives you a clear runway to pay off your debt in one go,” McBride said. “Lower debt and higher savings can help you better weather rising interest rates, and is more valuable if the economy weakens.”

Find out what fees you’ll have to pay (eg, balance transfer fees or annuity fees) and what the penalties are if you pay late or miss a payment during the zero-rate period. Period. The best strategy is to pay off as much of your current balance as possible before the zero-rate period ends — and to do so on time each month. Otherwise, if the rates continue to rise, the remaining balance will be subject to the new interest rate.

If you’re not switching to a zero-rate balance card, getting a personal loan with a relatively low fixed rate may be another option.

Mortgage rates are rising In the past year, it has risen by more than three percentage points.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.29% in the week ended Sept. 22. More than that Double what This was higher than in mid-September last year (2.86%), and higher than the start of this year (3.22%).

And maybe mortgage rates Climb even higher.

So if you are nearby Buying a house Or refinance one and lock in the lowest fixed rate available to you as soon as possible.

That is, “Don’t make a big purchase that isn’t right for you just because interest rates might go up. up to No matter what interest rates do in the future, rushing into buying a big-ticket item like a house or car that doesn’t fit into your budget is a recipe for trouble,” said Lacey Rogers, a Texas-based certified financial planner.

If you’re already a homeowner with a variable-rate home equity line of credit and have used a portion of it to do a home improvement project, McBride recommends asking your lender if they can adjust the rate on your balance. Fixed rate home loan. Say you have $50,000 in credit, but only $20,000 was used to renew. For $20,000 you will be asked to use a fixed rate.

If that’s not possible, consider taking out a HELOC with another lender at a lower incentive rate and paying off that balance, McBride suggested.

If you stash money in big banks that pay next to the interest on savings accounts and certificates of deposit, don’t expect that to change as the Fed raises rates, McBride said.

As big banks are swimming in deposits, they don’t need to worry about attracting new customers.

Thanks to paltry rates from the big players, banks’ average savings ratio is now just 0.13%, up from 0.06% in January, according to Bankrate.com’s Sept. 14 weekly survey of institutions. The average rate on one-year CDs stood at 0.77% as of September 19, down from 0.14% earlier in the year.

But online banks and credit unions will attract more deposits to feed their thriving lending businesses, McBride said. As a result, they offer very high rates and increase them as benchmark rates go higher.

So shop around. Few online savings accounts today pay more than 2%. And higher-yielding one-year CDs offer up to 2.50%. However, if you want to switch, choose only federally insured online banks and credit unions.

Considering today’s high inflation rates, Series I Savings Bonds Can be attractive because they are designed to protect your money’s purchasing power. They currently pay 9.62%.

But the rate will be valid only for six months and only if you buy the i-Bond before the end of October, after which the rate is scheduled to adjust. If inflation goes down, the rate on the I-Bond will also go down.

There are some limitations. You can only invest $10,000 per year. You cannot redeem it in the first year. If you’re in the money between two and five years, you’ll lose the previous three months’ interest.

“In other words, I-Bonds are not a substitute for your savings account,” McBride said.

However, if you don’t need to touch it for at least five years, they protect the purchasing power of your $10,000, which is nothing. They can be especially beneficial for people who plan to retire in the next 5 to 10 years, as they act as a safe annuity investment that they can use if needed during the first few years of retirement.

If inflation remains sticky despite high interest rates, you might also consider putting some money into Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

The confusing mix of factors at play in markets today makes it difficult to tell which sector, asset class or company will perform best in a rising rate environment, Ma noted.

“It’s not just rising rates and inflation, there’s geopolitical concerns going on…and we have a recession that either leads to a recession or it doesn’t…it’s an unusual, rare, combination of factors,” he said.

For example, financial services firms can do better in a rising rate environment because, among other things, they can make more money on loans. But in the event of an economic recession, the bank’s overall credit size may decrease.

For real estate, Ma said, “severely high interest and mortgage rates are challenging…and those headwinds may persist for a few quarters or more.”

Meanwhile, “commodity prices are down, but still a good hedge given the uncertainty in energy markets,” he said.

He is bullish on value stocks, Small caps, in particular, have performed well this year. “We expect that strong performance to continue on a multi-year basis going forward.” he said.

But broadly speaking, Ma suggests making your determination Overall portfolio Stocks are diversified across the board. The idea is to hedge your bets because some of those areas will come forward, but not all of them.

If you are planning to invest, he said Consider how consistent the firm’s pricing and demand for their product will be on a particular stock. For example, tech companies typically don’t benefit from rising rates. But as cloud and software service providers offer subscription prices to clients, they could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

To the extent you already own bonds, your bond prices will fall in a rising rate environment. But if you are in the market to buy bonds you are You can benefit from that trend, especially if you buy short-term bonds, i.e. one to three years. That’s because Their prices have fallen significantly relative to long-term bonds, and their yields have risen further. Normally short-term and long-term bonds move together.

“There’s a good chance “Short-term bonds, they’re heavily traded,” Flynn said. “Those in higher income tax brackets have a similar opportunity in tax-free municipal bonds.”

Ma added that 2-year Treasuries, which yield nearly 4%, “are attractive here because we don’t expect the central bank to go beyond that level with short-term interest rates.”

Muni prices are down significantly, yields are up, and many states are in better financial shape than before the pandemic, Flynn noted.

Other assets that may perform well are so-called floating-rate instruments of companies that need to raise cash, Flynn said. A floating rate is tied to a short-term benchmark rate, such as the Fed Funds Rate, so it rises whenever the central bank raises rates.

But unless you are a bond expert, it is better to invest in funds that specialize in taking advantage of the rising rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF that holds an array of different types of bonds.

“I don’t see a lot of these choices in 401(k)s,” he said. But you can always ask your 401(k) provider to add the option to your employer’s plan.