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

Editor’s note: This is an updated version of a story that was originally published on September 22, 2022.

The Federal Reserve raised its benchmark interest rate for the sixth time consecutively on Wednesday, to a range of 3.75% to 4%.

Although there can be many drawbacks In the form of higher borrowing costs for consumers, one positive result is that your savings can start earning some money after years of barely paying interest.

“Interest rates have risen at the fastest pace in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com. “Mortgage rates have soared to 20-year highs, home equity lines of credit are at 14-year highs and auto loan rates are at 11-year highs. Savers they’re seeing the best returns since 2008, if they’re willing to buy.”

Here are some ways to position your money so you can benefit from rising rates and protect yourself from their costs.

If you’ve been stashing cash at big banks that have paid next to nothing in interest on savings accounts and certificates of deposit, don’t expect that to change much, McBride said.

Thanks to low rates from the big players, the national average savings rate is still 0.16%, up from 0.06% in January, according to Bankrate.com’s Oct. 26 weekly survey of large institutions.

But all these Fed rate hikes they are starting to have a more significant impact on online banks and credit unions, McBride said. They offer much higher rates, with some exceeding 3% currently, and have been increasing them as reference rates rise.

As for certificates of deposit, there has been a notable increase in profitability. The average rate for a one-year credit union CD is 1.05% in October 27, up from 0.14% at the beginning of the year. But top-yielding one-year CDs now offer up to 4%.

So buy it. However, if you switch to an online bank or credit union, be sure to choose only those that are federally insured.

Given today’s high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money. They are currently paying 6.89%.

But that rate will only be in place for six months and only if you buy an I Bond by the end of April 2023, after which the rate is scheduled to adjust. If inflation falls, the rate on the I bond will also fall.

There are some limitations. You can only invest $10,000 a year. You cannot redeem it in the first year. And if you cash out between years two and five, you’ll lose the previous three months of interest.

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

However, they retain the purchasing power of your $10,000 if you don’t have 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 annuity investment that they can tap into if needed in their early retirement years.

If inflation proves sticky despite higher interest rates, you might also consider putting money into Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. Unlike Series I bonds, TIPS are marketable Treasuries, meaning they can be sold before maturity. They pay a fixed amount of interest every six months based on your adjusted principal. And that rate is set at auction, but never lower than 0.125%. At the most recent auction in October, for example, the 5-year TIPS had an interest rate of 1.625%.

When the overnight bank loan rate, also known as the fed funds rate, rises, it tends to follow different types of loans that banks offer to their customers.

So you can expect to see an increase in your credit card fees on a few statements.

The average credit card rate is 18.77% as of Nov. 2, up from 16.3% earlier this year, according to Bankrate.com.

“This latest interest rate hike will hit consumers who don’t pay their credit card balances in full through higher minimum monthly payments the hardest,” said Michele Raneri, vice president of U.S. Research and Consulting from TransUnion.

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

“It isolates you [future] rate hikes and gives you a clear path to paying off your debt once and for all,” said McBride. “Less debt and more savings will better weather rising interest rates, and it’s especially valuable if the economy gets worse.”

Just be sure to find out what fees, if any, you’ll have to pay (eg, 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 The best strategy is to always pay off as much of your existing balance as possible, 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 what you had before if rates continue to rise.

If you’re not transferring to a zero-rate balance card, another option could be to get a relatively low fixed-rate personal loan. Currently, rates on these loans range from 3% to 36%, with an average of 11.27%, according to Bankrate.com. But the best rate you can get would depend on things like your income, credit score, and debt-to-income ratio. Bankrate Tip: To get the best deal, ask a few lenders for quotes before filling out a loan application.

Mortgage rates have risen over the past year, increasing by more than three percentage points.

The 30-year fixed-rate mortgage averaged 7.08% in the week ended Oct. 27, according to Freddie Mac. That’s more than double a year ago.

In addition, mortgage rates may rise further.

So, if you’re close to buying a home or refinancing one, lock in the lowest fixed rate available as soon as possible.

That said, “don’t make a big purchase that isn’t right for you just because interest rates are going up.” up Rushing into a high-priced item like a house or car that doesn’t fit your budget is a recipe for trouble, no matter what interest rates do in the future,” he said Lacy Rogers, Certified Financial Planner in Texas.

If you already own a home with a variable rate home equity line of credit and have used a portion of it to do a home improvement project, McBride recommends asking your lender if possible fix the rate on your outstanding balance, effectively creating a fixed rate home loan.

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.

When investing, two big factors to consider are the effects of inflation on businesses and consumers, and the geopolitical outlook.

As for inflation, Ma pointed out, the costs of services, which make up a large part of it of the consumer price index, is what you need to watch. “The big question now is how sticky the services side of inflation turns out to be. While wage pressures have probably peaked, the labor market still looks quite strong and this could keep wage growth high and filter through -se to service inflation for a while,” Ma said.

On geopolitics, he added: “The market appears to have put geopolitical concerns in Europe on the back burner, but as winter approaches there is a risk that the energy war could escalate again.”

Financial services companies can do well in a rising rate environment because, among other things, they can make more money on loans. But if there is an economic slowdown, a bank’s overall lending volume could fall.

As for real estate, Ma said, “much higher interest rates and mortgages are a challenge … and this headwind could persist for a few more quarters or even longer.”

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

Remain bullish on value stocks, especially those of small capital, which have surpassed this year. “We expect this outperformance to persist into the future for several years.” he said

But broadly speaking, Ma suggests making sure your overall portfolio is diversified across stocks. The idea is to hedge your bets, as some of these areas will come out ahead, but not all.

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

To the extent you already hold 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 this trend, especially if you buy short-term bonds, that is, one to three years. This is because their prices have fallen more relative to long-term bonds and their yields have risen more. Typically, short-term and long-term bonds move in tandem.

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

Muni 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 can perform well are so-called floating-rate instruments of companies that need to raise cash, Flynn said. The floating rate is tied to a short-term reference rate, such as the fed funds rate, so it will rise whenever the Fed 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 or flexible income mutual fund or ETF, which contains a variety of different types of bonds.

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

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