The Federal Reserve raised interest rates. Now what?

Written by
Brooklyn Lowery
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Calculating interestWe warned it was coming and here it is: The Federal Reserve is raising rates after several years of near-the-bottom rates that have helped create a favorable environment for people looking to borrow money – whether to buy a house or to carry a balance on a credit card.

Now that the rates are increasing, what do you need to think about when it comes to your personal finances? Are the changes going to affect you or can you effectively escape the increase?

Well, the initial increase announced in March 2022 of .25% probably won’t send your finances reeling; but the Federal Reserve has indicated this is the first of several hikes expected this year as it seeks to control inflation. Eventually, those hikes will add up and your finances will start to feel it.

So now is the time to prepare. Here are five things to think about when the Federal Reserve starts raising rates.

1. Take stock of your debts and budget

When rates are low and steady, it’s easy to lose track of what you’re paying in interest and even whether you’re dealing with variable or fixed rates. It might come as a shock when your monthly payment for your variable rate loan suddenly goes up following a Federal Reserve rate hike.

It’s always a good idea to know where your money is going and how much you’re paying in interest, but it’s especially important when the interest rate is variable, as is common for credit cards, home equity lines of credit, adjustable rate mortgages and even some student loans.

When interest rates go up, your monthly payments will likely follow suit. Depending on how much you owe, that could mean a dramatic impact on your monthly budget. Take a look at everything you owe and plan accordingly so you’re still able to honor your commitments and make timely payments. You don’t want to fall behind – you’ll ultimately pay more and you could damage your credit as well. As mentioned, a single minimal hike likely won’t have a huge impact, but a series of hikes – as is expected throughout 2022 – could become more significant. Better to assess the situation now and make adjustments as needed.

2. Pay off your credit cards (and other adjustable debt) as soon as possible

If you’ve been enjoying a low interest rate and taking a casual approach to paying off credit card or other debt, it’s time to rethink that.

In particular, it’s never ideal to carry credit card debt, but sometimes it happens. If you’ve been carrying debt and gotten comfortable with paying that amount of interest, know that Federal Reserve rate increases very likely also mean credit card APR increases. That’s because most U.S. credit card APRs are based on the Prime Rate (which is highly influenced by the Federal Reserve rate); on top of that, there's a margin the bank charges. For instance, if the Prime Rate is 4.25% and your bank adds a margin of 8%-18% depending on your creditworthiness, your APR will be 12.25%-22.25%. Borrowers with shorter credit histories and lower overall credit scores are more likely to find themselves at the higher end of that range.

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3. Consider a balance transfer offer

If you’re staring a pile of credit card debt and know that it’s going to be another year or 18 months before you can pay it off, it could be time to consider a balance transfer offer.

The best balance transfer credit cards offer introductory 0% APR periods – some as long as 21 months –  during which you can pay off your balance without it continuing to accrue interest. During that time, your balance will be immune from rate hikes assuming you make your payments on time; late payments can mean banks cancel your introductory offer period.

Balance transfer cards aren’t right for everyone, but they are excellent options for many individuals.

4. Adjust your spending and payment habits

Certainly there are variable rate loans out there that have little to do with your spending habits, such as some student loans, adjustable rate mortgages and some personal loans/home equity lines of credit. Paying interest on credit card debt, however, is something you can generally control.

Credit cards work best when you use them for their convenience, security and perks and then pay off the balances in full every month. If that’s your practice, you don’t have to worry about the rate hike as it won’t affect your credit card situation. On the other hand, if you’re using credit cards as a way to extend your budget and spend beyond your means, start making changes now. You’re already paying interest, but you’re going to be paying more in interest soon.

5. Consider applying for additional loans now

The housing market has been wild of late, so no one could blame you for waiting it out, but with interest rates on the rise, you may not want to wait much longer if a mortgage application is in your future. The same goes for new car loans or some personal loans.

You never want to borrow money just to borrow money, but if you’ve been considering it for some time and have your finances otherwise in order, you might want to go ahead and secure those rates for fixed rate loans.

The bottom line is that debt costs money. For most people, some debt is inevitable, whether that’s a mortgage, car note or student loan, but you can take steps to minimize what you pay in interest on those debts. Furthermore, you can and should take steps to avoid “optional” debt like that accrued on credit cards if you spend beyond your means. The sooner you act, the more you save, regardless of what the Federal Reserve decides to do with interest rates in the future.

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