After several years of historic lows, interest rates are set to begin rising in 2022. The Federal Reserve Board has said it will begin raising its federal funds rate in March, with incremental increases expected several more times this year.
Rising interest rates can have both positive and negative effects on consumers. Here’s how the increases might affect you, and what you can do to be prepared.
You’ll Pay More to Borrow Money
Why? Banks and other lenders base their interest rates on the federal funds rate. So, as the Fed raises its rate, interest rate increases will follow on everything from credit cards, vehicles, mortgage loans and personal loans.
What to Do? If you’re currently carrying high-interest credit card debt, work to pay off as much as you can before the rate starts rising. Even a small increase in your credit card’s interest rate can add up to paying hundreds of dollars more in interest over time.
If you’re not able to pay off your credit card debt, consider getting a card with a 0% or low-rate introductory offer on balance transfers. Transfer your balance to the new card and work to pay it off during the zero-interest period. That way, you can avoid paying higher interest on the debt you already have.
Considering new debt? If possible, get that mortgage, car loan or home equity line of credit before the rates start going up. A marginally lower interest rate can save you thousands of dollars in interest over the life of a loan.
You’ll Earn More for Saving Money
Why? Just as borrowers must pay more to borrow money when interest rates rise, banks generally also pay more interest to savers. As rates increase, savers will earn higher rates on the money they deposit in savings and money market deposit accounts.
What to Do? If you’re not already saving a portion of each paycheck, consider setting up an automatic deposit into a savings or money market account. Often, the accounts that pay the highest interest rates are at online banks. The more money you can sock away into a savings account, the more interest you’ll earn as the rates continue to increase over the coming months.
You’ll Pay Less for Goods and Services
Why? Inflation has been rising in recent months, hitting a 40-year high of 7.5% in January 2022. That means we’re paying significantly more for groceries, fuel, and almost everything else.
Higher interest rates are one of the most common tools for reeling in inflation. When rates rise, fewer people are willing to borrow and more people are interested in saving. As a result, the economy slows down and prices start dropping. By lowering the demand for goods, rising rates can help lower prices. They may also help alleviate supply chain issues, which are another reason for current high prices.
What to Do? Higher prices can pummel any budget. If you’re trying to lessen the effects of inflation, consider ways to cut your grocery bill, such as consuming less meat, and cut your gas bill, such as taking public transportation.
Planning to make a large purchase, such as a car or major appliance? Consider waiting a few months if possible. If rising interest rates do their job and help slow the economy, you may be able to purchase the item you need for a lot less money in several months.