
How Rising Interest Rates Could Affect Your Finances
How Rising Interest Rates Could Affect Your Finances
In a move to continue fighting high inflation, the Federal Reserve recently announced that it raised the federal funds rate 50 basis points (or half-a-percentage point). This follows the Fed’s 25 basis point increase in March, and it’s the biggest interest rate hike in two decades. While higher interest rates can help moderate demand for goods, which can in turn reduce inflation, Americans are wondering what this means for their finances, especially with further rate increases projected for 2022. Read on to learn how your finances could be impacted.
Stock Market
In the short term, Fed rate increases may compel some conservative investors to sell stocks and move into less risky investments such as certificates of deposit (CDs) or high-yield savings accounts, but there is resounding evidence that rate hikes don’t typically hurt stocks over the longer term. It’s best to keep your focus on long-term financial goals and wait for the complex process of higher rates to work their way through the economy.
Credit Card Interest
Interest rates on consumer debt typically move in lockstep with the Fed’s rate, so credit card debt becomes more expensive when the Fed raises interest rates. Most credit card issuers base a cardholder’s APR on the prime rate, which is the interest rate banks pass onto their least risky customers. If you are not among the most creditworthy borrowers, expect to be charged a variable APR based on a combination of the prime rate plus an added percentage. For example, if your credit card APR was 16.25%, after the Fed’s half-a-percentage point hike in interest rates, your card issuer will likely increase your APR to 16.75%. Consider taking advantage of a 0% APR balance transfer card to help pay down debt as much as possible while interest rates are climbing.
Mortgages
The fed funds rate doesn’t directly influence mortgage rates, but hiking interest rates boosts the 10-year Treasury yield, which does directly influence home loan rates. Additionally, the mortgage industry as a whole is ever watchful of the Fed, and the industry’s competence in interpreting the Fed’s actions means that mortgage rates usually move in the same direction as the federal funds rate. Keep in mind, however, that mortgage rates also react to the ebb and flow of the U.S. and global economies, moving up and down daily.
If you have a home equity line of credit or an adjustable-rate mortgage, you can expect your rates to increase. To help offset higher loan costs, consider paying to lock in your interest rate now as it’s likely that mortgage rates will continue to increase for the time being.
Student Loans
Federal and private student loans with fixed interest rates won’t be affected by the Fed’s interest rate hikes, but some private loans are influenced by Fed rates, so it’s feasible that the interest rates on those could rise. If the cost to refinance a private loan is worth the overall savings, it may be a good time to consider this move.
Savings Accounts
Rising Fed interest rates are typically good for savings accounts—eventually. Generally, banks raise rates to attract deposits, but as in cases like the present, where they have plenty of cash, they tend to delay increasing the annual percentage yields (APYs) they pay on deposit accounts like savings accounts, money market accounts, and CDs. The amount of time it takes for a financial institution to extend higher APYs on deposits depends on the individual bank. Online banks, smaller banks, and credit unions typically offer higher yields than big banks in order to gain new customers, and these institutions may increase rates faster since they have to compete more for deposits. During times of increasing inflation, it may be best to stash your cash at a smaller bank or credit union.
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