Connect with us

News

Here’s how to prepare if there is a 50 basis point rate hike in the Fed

Consumers are spending more to keep up with the rising cost of living, and it may get worse before it gets better.

“While wage growth has been the best in decades, it has been overtaken by rising household costs,” said Greg McBride, financial analyst at Bankrate.com. “With inflation at a peak in 40 years, it’s all worries.”

After the Federal Reserve raised interest rates for the first time in more than three years, President Jerome Powell promised tough measures against inflation, which he said would jeopardize an otherwise strong economic recovery.

They have to catch up and they will not do it in small steps.

Greg McBride

financial analyst at Bankrate.com

Now the expectation is that the central bank will raise interest rates by half a percentage point at its meeting this week.

“The Fed is behind the curve, they have to catch up and they will not do it in small steps,” McBride said.

The move will equate to a rise in prime interest rates and immediately send financing costs higher for many types of consumer loans.

Where interest rates will rise

Consumers will see their short-term borrowing rates, especially on credit cards, among the first to jump.

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark, so your annual percentage will increase with each withdrawal from the Fed, usually within a billing cycle or two.

Interest rate adjustment loans and mortgages are also linked to the prime interest rate. Most ARMs adjust once a year, but a HELOC adjusts immediately.

Because 15-year and 30-year mortgage rates are fixed and tied to government bonds and the economy, homeowners will not be immediately affected by a rate hike. But anyone shopping for a new home is already going to pay more for their next home loan (the same goes for car buyers and student loan borrowers).

“The predicted increase is already built into mortgage rates,” he said Holden Lewis, housing and mortgage expert at NerdWallet.

The average interest rate on 30-year fixed-rate mortgages rose to 5.37% last week, the highest since 2009 and is also expected to continue to move higher over the year.

Here are three ways to stay on top of rising prices.

Repay debt

When interest rates rise, the best thing you can do is pay down debt before major interest payments drag you down.

When you look at the debt you owe, to the extent you can, pay the higher interest rate down first, said Christopher Jones, chief investment officer at Edelman Financial Engines – and “credit cards tend to be by far the highest.”

In fact, credit card rates right now are just over 16%, significantly higher than almost any other consumer loan and could go as high as 18.5% by the end of the year – which would be a record ever, according to Ted Rossman, a senior industry analyst at CreditCards .com.

More from the FA Playbook:

Here’s a look at other stories that affect the financial advisory business.

If you have a balance, try calling your card issuer to ask for a lower interest rate, consolidate and repay high-interest credit cards with a lower-interest or personal loan, or switch to an interest-free balance transfer credit card.

“Zero-percent balance transfer cards are alive and well,” Rossman said, adding that cards offering 15, 18 and even 21 months without interest on transferred balances are “a great way to save hundreds, maybe thousands of dollars in interest. . “

2. Find a better savings rate

Although the Fed has no direct influence on deposit rates, they tend to be correlated with changes in the Federal Reserve’s target rate. As a result, the savings account in some of the largest retail banks has been close to the bottom, currently only 0.06% on average.

Because inflation is now much higher than this, money in savings loses purchasing power over time.

“The worst thing would be if your borrowing costs go up but you do not benefit from a higher savings rate,” said Yiming Ma, an assistant professor of finance at Columbia University Business School.

Partly thanks to lower overhead expenses, the average online savings account is often higher than the rate of a traditional, physical bank.

Meanwhile, top-yielding CD rates average more than 1% – even better than a high-yield savings account.

The CDs that provide the highest returns typically have higher minimum deposit requirements compared to an online savings account and require longer expiration periods. This means that money is not as available as it is in a savings account.

“You do not put money into emergency savings for the prospect of big returns,” McBride said. “It’s the buffer between you and 17% credit card debt when an unplanned expense arises.”

But “if you have extra savings, think about deposits that can be set aside,” Ma added. “Now is the time to make use of that increase in rates.”

Boost your credit score

As a general rule, the higher your credit score, the better off you will be.

Borrowers with good or excellent credit ratings (generally anything above 700 or 760, respectively) will qualify for lower rates, and this will go a long way as financing costs creep up.

For example, shaving a percentage point of a new auto loan can save up to $ 50 a month, according to Francis Creighton, president and CEO of the Consumer Data Industry Association.

On a 30-year mortgage, even getting a slightly better interest rate can mean monthly savings in the hundreds.

“For someone trying to make ends meet, it’s real money,” Creighton said.

The best way to increase your credit score comes down to paying your bills on time or reducing your credit card balance, but there are even simple fixes that can have an immediate impact, such as checking your credit report for errors, Creighton advised.

You want to enter the inflation period in the strongest position you can be in.

Subscribe to CNBC on YouTube.

Click to comment

Leave a Reply

Your email address will not be published.