Most people are feeling the impact of inflation—whether you’re at the grocery store, gas station, shopping online, hiring a contractor, or doing almost anything that requires spending money. Earlier this year, the Federal Reserve started raising interest rates to rein in inflation, which reached another 40-year high in June. By raising rates, the Fed hopes to slow the economy and slow inflation. That’s because as borrowing becomes more expensive, consumers tend to reduce spending. The drop in demand eventually leads to lower prices.
The Fed doesn’t set interest rates on credit cards, mortgages, auto loans, and savings accounts, but its actions influence them. Here are four ways interest rate hikes can affect your finances, along with tips for minimizing the impact:
1. Credit Cards. Most cards charge a variable rate tied to the bank’s prime rate—the rate banks charge their best customers (many consumers pay an additional rate on top of prime, based on their credit profile). Banks typically raise prime rates quickly after the Fed boosts its key rate.
Tip: It may take a couple of statements before you notice the impact of a rate increase. Start paying down any balance before rates get much higher, focusing on the card with the highest rate first. Mortgages
2. Mortgages. If you have a fixed-rate mortgage, your monthly payments will stay the same. If you refinanced over the past few years and locked in a rate in the 2–3 percent range, that was really good timing. If you have an adjustable-rate mortgage (ARM), however, you may be faced with having to make larger payments, depending on the terms of your loan.
Tip: If you have an ARM, budget for higher payments. Or, if you anticipate buying a home in the next year or two, take steps to improve your credit score so you can secure a lower interest rate.
3. Home Equity Line of Credit (HELOC). This allows you to borrow against the equity in your home as needed, usually at a variable interest rate. Borrowers typically pay only interest on the amount borrowed for the first 10 years, and thereafter must repay interest and the principal over the next, say, 15–20 years. Your HELOC rate can adjust monthly or quarterly. So, if you have an outstanding balance, your payments will likely go up when the Fed implements a rate hike.
Tip: If you have a HELOC, budget for higher payments. You can pay down your HELOC balance to reduce the interest you pay or talk to your lender about options, such as refinancing.
4. Auto Loans. It’s already more expensive to buy a new or used car; their prices have increased dramatically in the past two years. This is due to a variety of reasons that have resulted in supply not keeping up with demand. Unfortunately, if you’re planning on financing the purchase of a vehicle in the near future, you’ll need to add in the higher cost of borrowing.
Tip: Make a down payment of at least 20 percent of the purchase of a new car, and no less than 10 percent for a used car. A sizable down payment will lower monthly payments and could secure a lower interest rate.
If you have questions about how higher interest rates may impact your finances, please reach out to our team. We would be happy to discuss your specific situation and develop a plan that works for you!