Here are your best money moves after the Fed’s major interest rate hikes
1. Credit cards
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Since most credit cards have a variable rate, as opposed to a locked fixed rate, there is a direct link to the Fed’s benchmark. As the federal funds rate increases, the prime rate also increases, and your annual percentage rate could increase within a billing cycle or two.
Average credit card rates are currently just over 17%, significantly higher than almost all other consumer loans, and could reach 19% by the end of the year – which would be an all-time high. , according to Ted Rossman, a senior industry analyst at CreditCards.com.
“There are a lot of things we can’t control, like high inflation and rising interest rates, but you can take steps to reduce your debt load and the interest rate you pay,” he said. he declared.
Pro Tip: The best thing to do is to pay off the debt before larger interest payments drag you down.
If you have a balance, upgrade to the 0% intro APR credit card, Rossman advised. “You can still get up to 21 months interest-free on select balance transfers,” he said, such as Wells Fargo Reflect, Citi Simplicity or Citi Diamond Preferred.
“They all have transfer fees, but I think it’s worth it,” Rossman said. “That ability to avoid interest for nearly two years is huge.”
Otherwise, consolidate and pay off high interest credit cards with a lower interest rate home equity loan or personal loan.
“If you have good credit, you might be able to get 6% over five years,” Rossman noted.
Another option is to take out a loan from your 401(k), although this may put your retirement savings at risk. Still, it may be worth it for some if they have a high credit card balance and rates keep rising.
2. Mortgage rates
Mortgage rates are fixed and linked to Treasury yields and the economy, so they have actually fallen from recent highs, largely due to the prospect of a Fed-induced economic slowdown.
However, variable rate mortgages and home equity lines of credit are indexed to the prime rate and these rates increase.
“ARMs and HELOCs will become more expensive,” said Jacob Channel, senior economist at LendingTree.
“Borrowers not only need to make sure they can handle their potentially higher payments over time before getting an ARM or HELOC, but they should also be sure to research a lender in order to get the best rate. as low as possible,” he added. .
Pro Tip: If you’re worried about your payment going up, you might want to consider a fixed-rate mortgage or home equity loan, instead of an ARM or HELOC, Channel advised.
“While fixed-rate loans typically have higher introductory rates than their adjustable-rate counterparts, the stability they provide may be worth the extra upfront cost,” he said. “Beyond that, once you have a fixed rate loan, you don’t have to worry about your rate going up over time.”
3. Car loans
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Most auto loans have fixed rates, so existing borrowers shouldn’t be affected by the rate hike, Rossman said.
“With recessionary concerns looming, chances are most of the rise in auto loan rates is behind us,” Rossman said.
Pro Tip: Even though auto loan rates are not at historic highs, there is no doubt that inflation has hit vehicle prices hard. Experts say now may not be the best time to buy a new car, while some may want to consider a used car to save on costs.
When it comes to auto loans, “the best thing consumers can do to save money is to get their own financing before setting foot in a car dealership,” said Erin Witte, chief protection officer. of consumers at the Consumer Federation of America.
To boost profits, car dealerships sometimes mark up their interest rate above what a lender has agreed to accept, Witte said.
“Arranging your own financing can save you money by taking the margin of secrecy out of the equation,” she said.
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Borrowers with existing fixed-rate federal student loans won’t see an increase in their interest rates, higher education expert Mark Kantrowitz said.
However, interest rates on federal student loans taken out next year will be higher, with a rate of at least 5.75%, Kantrowitz said.
Meanwhile, those with variable-rate private student loans will see their rates rise due to the Fed’s actions, he added.
Pro tip: Borrowers who already have variable-rate private student loans can refinance them into a fixed-rate private student loan, Kantrowitz said.
“The interest rate will be higher than on the variable rate loan, but it will not increase as the interest rate on the variable rate loan will,” he said. “Since interest rate hikes have had no impact on inflation, the Federal Reserve should implement several more.”
More generally, students and families should try to borrow less as student loans become more expensive, Kantrowitz added.
“Focus on free money first, like scholarships and grants,” he said, recommending families fill out the free application for federal student aid, known as FAFSAand search for scholarships on websites such as Fastweb.com and the The great future of the College Board.
And some good news: as borrowing will become more expensive, these higher interest rates will reward savers. Rates on online savings accounts, money market accounts and certificates of deposit are all set to increase.