The Federal Reserve approved the 11th consecutive interest rate hike in a little over a year, increasing rates to the highest level in 22 years. The recent interest rate hikes, the most aggressive since the 1980s economic crisis, aim to slow spending that has been a factor in rising inflation.
You may be wondering “How will the increase in interest rates impact my finances?” And “What can I do to protect my finances?”
There are a few ways the Federal Reserve hike can impact your finances.
- It may cost more to borrow. While raising interest rates slows inflation, loans like mortgages, credit cards, and auto loans tied to prime rates may get more expensive.
- Student loans may be more expensive. Private student loans are tied to Federal rates so your interest rates and payments could rise.
Although you may see increases in the amounts you have to pay on your loans, there are some moves you can make now to protect your finances.
- Pay down debt. If you have debt tied to the prime rate like credit card debt, pay off your debt as soon as possible if you can. Especially since interest rates may increase again this year. To help you tackle your debt, you can try the debt snowball method and start paying your lowest balance debt first and work your way up, applying the payment you were making to the next outstanding balance.
- Refinance for lower interest rates. With the possibility of interest rates increasing again, you may want to consider refinancing any high-variable interest rate loans on your home loan or student loans to a fixed rate loan. At tax-time, you will still be able to deduct your home mortgage interest and you may be able to deduct your student loan interest up to $2,500. If you refinance your home loan, you may be able to deduct the points you pay on the refinance of your home.
- Consolidate Debt. If you have outstanding credit card balances, consider transferring them to a low interest and in some cases zero interest balance transfer credit cards. Many credit card companies have low introductory rate credit cards that let you to pay low or zero interest on balances for a certain period of time before rates change. The key is to take full advantage of the low interest rates and pay your balances off within the introductory period.
- Boost Your Credit Score. By boosting your credit score, you will be able to take advantage of lower interest rates whether seeking a home loan or lower interest credit card. To increase your score, make your debt payment on time, and pay down debt keeping your credit utilization ratio low.
- Save for a Rainy Day. In times of rising interest rates, you want to have an emergency fund so that you don’t have to rely on high interest rate credit cards when you have an emergency.
Many states provided their own stimulus relief packages to help ease the burden of inflation that families are experiencing. California is one of the states that passed the California Stimulus Relief Package in July 2022.
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