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

What rising interest rates mean for your credit, loans, savings and more
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It is the fifth increase of the US central bank in six months and its third consecutive rise of 75 basis points, which it will put upward pressure on other interest rates throughout the economy.

For consumers, the Fed’s move will once again raise the question of where to put their savings for the best return and how to minimize their borrowing costs.

“Credit card rates are the highest since 1995, mortgage rates are the highest since 2008, and auto loan rates are the highest since 2012. With more rate hikes to come, it will be additional pressure on variable-rate household budgets. debt like home equity lines of credit and credit cards,” said Greg McBride, chief financial analyst at “On a positive note, savers are seeing high-yield savings accounts and certificates of deposit at levels seen by last time in 2009”.

Here are some ways to put your money so you can take advantage of rising rates and protect yourself from your downside.

Credit cards: Minimize the bite

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

So you can expect to see your credit card rates increase in just a few statements.

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

The Fed returns in a big way with the third consecutive rate hike of 75 basis points

Best advice: If you have balances on your credit cards, which typically carry high variable interest rates, consider transferring them to a zero-rate balance transfer card that locks in a zero rate for 12 to 21 months.

“That isolates you from [future] rate increases, and it gives you a clear path to pay off your debt once and for all,” McBride said. “Less debt and more savings will allow you to better weather rising interest rates, and it’s especially valuable if the economy deteriorates.”

Just be sure to find out what fees, if any, you’ll have to pay (for example, a balance transfer fee or an annual fee) and what the penalties will be if you make a late payment or miss a payment during the zero-rate period. period. The best strategy is always to pay off as much of your existing balance as possible, and to do so on time each month, before the zero-rate period ends. Otherwise, any remaining balance will be subject to a new interest rate that could be higher than it was before if rates continue to rise.

If you don’t transfer to a zero-rate balance card, another option might be to take out a relatively low fixed-rate personal loan.

Home Loans: Lock in Fixed Rates Now

Mortgage rates have been rising over the past year, jumping more than three percentage points.

The 30-year fixed-rate mortgage averaged 6.29% in the week ending September 22, down from 6.02% the week before, according to Freddie Mac. That’s more than double what it was mid-September last year (2.86%), and markedly higher than where it started this year (3.22%).

Mortgage rates can go up even more.

So if you’re around buy a house or refinance one, lock in the lowest fixed rate available to you as soon as possible.
What will my monthly mortgage payment be?

That said, “don’t jump into a big purchase that isn’t right for you just because interest rates could go up.” up. Rushing into the purchase of a big-ticket item like a house or a car that doesn’t fit your budget is a recipe for trouble, regardless of what interest rates do in the future,” said Lacy Rogers, a certified financial planner with based in Texas.

If you already own a home with a variable-rate home equity line of credit and used part of it for a home improvement project, McBride recommends asking your lender if it’s possible to lock in the rate on your outstanding balance, effectively creating a fixed-rate home equity loan. Let’s say he has a $50,000 line of credit but only used $20,000 for a renovation. You would ask that a flat rate be applied to the $20,000.

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

Bank savings: Compare prices

If you’ve been stashing cash at big banks that have been paying next to nothing in interest on savings accounts and certificates of deposit, don’t expect that to change just because the Fed is raising rates, McBride said.

That’s because the big banks swim in deposits and don’t need to worry about attracting new customers.

Thanks to paltry rates from the big players, the average bank savings rate is now just 0.13%, down from 0.06% in January, according to’s Sept. 14 weekly survey of institutions. The average rate on a one-year CD is now 0.77% as of September 19, up from 0.14% at the beginning of the year.

But online banks and credit unions are looking to attract more deposits to fuel their thriving lending businesses, McBride said. consequently, they are offering much higher rates and have been increasing them as the reference rates go up.

So shop around. Today, some online savings accounts are paying more than 2%. And one-year high-yield CDs offer up to 2.50%. However, if you want to make a switch, be sure to only choose those online banks and credit unions that are federally insured.

Another high-yield savings option

Given the current high inflation rates, Series I Savings Bonds they can be attractive because they are designed to preserve the purchasing power of your money. They are currently paying 9.62%.

But that rate will only be in effect for six months and only if you buy an I-Bond before the end of October, after which the rate is scheduled to adjust. If inflation falls, the I-Bond rate will also fall.

There are some limitations. You can only invest $10,000 a year. Cannot be redeemed in the first year. And if you charge between years two and five, you will lose the interest of the previous three months.

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

However, you retain the purchasing power of your $10,000 if you don’t need to touch it for at least five years, and that’s nothing. They can also be of particular benefit to people planning to retire in the next 5 to 10 years, as they will serve as a safe annual investment that they can leverage if needed in their early retirement years.

If inflation remains stagnant despite rising interest rates, it might also consider putting some money in Treasury inflation-protected securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Stocks: Look for broad exposure and pricing power

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

“It’s not just about rising rates and inflation, there are geopolitical concerns… And we have a slowdown that may or may not lead to a recession… It’s a rare, even rare, combination of multiple factors, “he said.

For example, financial services companies may do well in a rising rate environment because, among other things, they can make more money on loans. But if there is an economic downturn, a bank’s total lending volume could decline.

In terms of real estate, Ma said, “markedly higher mortgage and interest rates are a challenge…and that headwind could linger for a few more quarters or even longer.”

How does inflation affect my standard of living?

In the meantime, he added, “commodities have come down in price, but they remain a good hedge given the uncertainty in energy markets.”

He remains bullish on value stocks, especially small caps, which have outperformed this year. “We expect that outperformance to persist into the future on a multi-year basis,” he said.

But generally speaking, Mom says making sure your overall wallet It is diversified in shares. The idea is to hedge your bets, as some of those areas will come out on top, but not all.

That said, if you plan to invest On a specific stock, consider the company’s pricing power and how consistent demand for its product is likely to be. For example, technology companies typically don’t benefit from rising rates. But since software and cloud service providers issue subscription prices to customers, these can rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Bonds: Go Short

To the extent that you already own bonds, your bond prices will fall in a rising rate environment. But if you’re in the market to buy bonds, You can benefit from that trend, especially if you buy short-term bonds, that is, one to three years. That is because their prices have fallen more relative to long-term bonds and their yields have risen more. Short and long bonds typically move in tandem.

“There is a very good opportunity in short-term bonds, which are severely dislocated,” Flynn said. “For those in higher income tax brackets, a similar opportunity exists in tax-free municipal bonds.”

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

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

Other assets that may do well are so-called floating-rate instruments of companies that need to raise cash, Flynn said. The floating rate is pegged to a short-term benchmark rate, such as the fed funds rate, so it will rise every time the Federal Reserve raises rates.

But if you’re not a bond expert, you’d be better off investing in a fund that specializes in making the most of a 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, which will contain a variety of different types of bonds.

“I don’t see many of these options in 401(k) plans,” he said. But you can always ask your 401(k) provider to include the option in your employer’s plan.

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