Now that the Federal Reserve raised interest rates as expected on Wednesday, consumers should take stock of their financial exposure to the new economic reality.
More interest rate increases will follow.
“The wind is blowing in one direction now, and that’s toward higher interest rates,” said Greg McBride, chief financial strategist at Bankrate.com.
This marks the Fed’s third step in two years toward a higher and more normal interest rate level. Like the others, it will hit credit cards, mortgages, home equity loans and saving accounts.
The punch will be harder for borrowers who aren’t on their guard. And the benefits of higher rates could skip savers completely if they don’t shop for better deals.
Several organizations in the Kansas City area offer financial coaching services and are listed along with information about financial topics at moneysmartkc.org. Here are some tips to help you make the most of rising interest rates.
▪ Reduce credit card balances as much as you can, as quickly as you can.
McBride said card companies will bump up their interest rates within one or two billing cycles of the Fed’s action. Paying down those balances reduces the extra you will have to pay in interest. Failing to reduce the balances means the amount you owe will grow faster with the higher interest rate.
▪ Take advantage of zero-percent balance transfer offers some credit cards make.
Ron Farmer, co-founder of CHES Inc. in Kansas City, said cardholders with balances should look for zero percent balance transfer deals. These will charge no interest for a year or more, giving the consumer time to pay down the balance without having to pay interest and without interest payments piling up.
Most consumers with a credit card carrying a balance should qualify for a transfer, Farmer said, unless they have “credit challenges” such as late or missed payments.
That would include clients Leoni Segura helps at the Prosperity Center for Financial Opportunity in Kansas City. Many have seen fees and penalties drive the balances on their cards to far beyond their original credit limits.
Higher interest rates “take them further away from paying off that debt,” said Segura, a financial coach and supportive resources counselor at the center.
Segura cautions that at least some credit card balance transfer offers with a no-interest period still accumulate interest that has to be repaid if the balance isn’t paid off in full.
The best move is to establish a strong budget based on take-home pay and find creative ways to cut expenses. One client, Segura said, works at a community garden to supplement her food budget with fresh produce.
The Prosperity Center is holding a free session for the public, “Dealing with Debt: Strategies and Tools.” It will run from 9:30 to 11 a.m. April 22 at the Rockhurst University Community Center, 5401 Troost Ave. in Kansas City.
▪ Home shoppers should lock in a mortgage rate but only once they’re fairly certain about their closing date.
McBride said mortgage rates have moved up ahead of the Fed’s rate increase. Locking in the mortgage rate once the closing date is “reasonably certain” protects the borrower against unexpected mortgage rate swings for the 40- to 45-day lock-in.
Farmer said homeowners who want to refinance mortgages already face the higher rates but might see rates dip a bit, assuming the Fed doesn’t surprise markets with hints that it may act again sooner than expected.
▪ Wait to see the impact on federal student loans before making borrowing decisions.
Interest rates on new federal loans for the 2017-2018 school year will be set based on the results of a May federal auction of 10-year Treasury securities. The Fed’s quarter-point rate increase Wednesday will have some impact on that May auction, but it likely won’t be significant, said David Levy, editor of edvisors.com.
For example, a quarter-point higher interest rate on a 10-year student loan would add $1.25 to monthly payments for each $10,000 borrowed, he said.
Private student loans, both at fixed and variable interest rates, are available as well, and Levy said rates on those climbed ahead of the Fed’s action Wednesday.
“We always tell students to borrow federal first because the terms and conditions are generally better than they are with private student loans,” Levy said.
More than two years ago, before the Fed made its first step toward higher interest rates, Levy wrote about the impact of a string of rate increases on student debt. Refinancing variable-rate private loans is one idea to consider.
▪ Car buyers can shop in peace.
Farmer said the Fed’s rate increase will hit car loans quickly. But McBride said the increase won’t impact a buyer’s decision meaningfully — only $3 a month more on a $20,000 car loan, he said.
“Nobody’s going to downsize from the SUV to the compact because of that,” McBride said.
▪ Savers need to stay nimble and keep shopping for the highest rates.
Savers have suffered for years under the Fed’s persistent low interest rate policies. They haven’t benefited much from the Fed’s first two rate increases and won’t now unless they work at it, McBride said.
“You have to go out and find the better yields. They’re not going to find you,” he said.
Compare savings rates only on accounts covered by the Federal Deposit Insurance Corp., which ensures the account is safe.
McBride suggests high-yielding savings accounts or certificates of deposit of six months. Savers are not getting much reward for tying up their savings for two or more years. Longer CDs also mean savers will miss out on the chance to collect higher rates as they arrive.