Inflation is a hot topic and for good reason. If you’ve been keeping an eye on headlines, you’ve probably seen a lot about how inflation affects the economy and how it could impact your wallet.
Often one of the main consequences of skyrocketing inflation is rising interest rates. Raising the benchmark interest rate is one financial tool the Federal Reserve uses to help curb inflation. As rates rise, it’s worth considering the effect that higher interest rates can have on your wallet.
But what does that mean for you? And what should you do about it? We’ll explain—and give some tips for making smart money moves.
Pay Down Credit Cards
Credit card interest rates are often the hardest hit regarding interest rate hikes. And if rate hikes follow periods of spiked inflation, it’s possible that your credit card balance is even higher.
“Credit cards are mostly pegged to the prime rate. When the Federal Reserve raises short-term interest rates, the prime rate follows,” writes CNBC Personal Finance Reporter Lorie Konish. Interest rates on credit cards are typically much higher than interest rates on other forms of debt like mortgage loans. For example, the average 30-year mortgage rate has been trending around 5%, while the average credit card rate is trending between 15% and 20%. However, if the Fed were to raise interest rates aggressively, your credit card interest rate could also shoot up.
“For the cardholder, your rate will mimic what the Fed does the whole way up,” said Greg McBride, senior vice president, and chief financial analyst at Bankrate.com. “The action step to take now if you’re carrying a balance and trying to get out of debt, trying to insulate yourself from high rates, is to grab one of those low-rate balance transfer offers now,” McBride said.
The Fed’s move to raise interest rates has made credit card debt more expensive, so pay down any outstanding balances as quickly as possible. Your monthly minimum payments will still be the same, but now they’ll cost you more.
Take Advantage of Online Savings Accounts
Online savings accounts are known to be competitive places to invest your cash as interest rates increase. These accounts generally seek lower interest rates than money market funds. You might have to do some research to find a good rate, but it’s worth it if you’re looking for higher returns on your money. Certificates of deposit, however, require you to lock in your rate for a fixed amount of time.
Consider Mortgage Rate Options
“We’ve been very spoiled by low rates, for sure,” said McBride. For many borrowers, getting a fixed-rate mortgage has been a no-brainer. With rates near record lows, it makes sense that most homeowners and buyers would want to take advantage of low rates while they can. However, as rates start to rise, you may want to consider other options. For example, if you don’t plan on staying in your home long-term, you might consider getting an adjustable-rate mortgage. Just bought-rate mortgages often start at lower interest rates than fixed-rate mortgages.
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BLOG SOURCE: CNBC
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