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

This is the fifth U.S. central bank increase in six month and its third consecutive increase of 75 basis points, which will put upward pressure on other interest rates across the economy.

For consumers, the Fed’s decision will once again spur the question of where to put their savings to get the best return and how to minimize their borrowing costs.

“Credit card rates are the highest since 1995, mortgage rates are the highest since 2008, and auto loan rates are the highest since 2012. With more rate hikes to come, this will further weigh on variable rate household budgets such as home equity lines of credit and credit cards,” said Greg McBride, chief financial analyst at Bankrate.com. yield savings and certificates of deposit at levels not seen in 2009.”

Here are some ways to invest your money so that you can take advantage of rising rates and protect yourself from falling rates.

Credit cards: minimize the bite

When the overnight bank lending rate – also known as the federal funds rate – rises, various loan rates that banks offer their customers tend to follow.

So you can expect to see your credit card rates rise within a few statements.

Currently, the average credit card rate is 18.16%, up from 16.3% at the start of the year, according to Bankrate.com.

Best Advice: 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 locks in a zero rate for 12-21 months.

“It isolates you from [future] rate hikes, and that gives you a clear track to pay off your debt once and for all,” McBride said. “Less debt and more savings will make you more resilient to rising interest rates, and this is particularly helpful if the economy is deteriorating.

Just make sure you know what fees, if any, you’ll have to pay (for example, 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 always to pay off as much of your existing balance as possible – and to do so on time each month – before the zero rate period ends. Otherwise, any remaining balance will be subject to a new interest rate which may be higher than the one you had before if rates continue to rise.

If you’re not transferring to a zero-rate balance card, another option might be to get a relatively low fixed-rate personal loan.

Home loans: Lock in fixed rates now

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

The 30-year fixed-rate mortgage averaged 6.29% in the week ending Sept. 22, down from 6.02% the previous week, according to Freddie Mac. It’s more than double What that was mid-September last year (2.86%), and significantly higher than where it started this year (3.22%).

And mortgage rates can climb even further.

So if you’re about to buy a home or refinance one, secure the lowest fixed rate available to you as soon as possible.
What will my monthly mortgage payment be?

That said, “don’t go into a big purchase that isn’t right for you just because interest rates might at the top. Rushing into buying a big-ticket item like a house or a car that doesn’t fit in your budget is trouble, regardless of what interest rates will do in the future,” Lacy said. Rogers, a certified financial planner based in Texas.

If you already own a home with an adjustable rate home equity line of credit and used part of it to complete a home improvement project, McBride recommends asking your lender if it’s possible to fix the rate. on your outstanding balance, creating a fixed rate home loan. Let’s say you have a $50,000 line of credit, but only used $20,000 for a renovation. You would ask that a flat rate be applied to the $20,000.

If that’s not possible, consider paying off that balance by taking out a HELOC from another lender at a lower promotional rate, McBride suggested.

Bank savings: shop around

If you’ve been hiding money in big banks that have paid next to nothing in interest for savings accounts and certificates of deposit, don’t expect that to change just because the Fed raises rates. , McBride said.

This is because the big banks are swimming in deposits and don’t have to worry about attracting new customers.

Thanks to paltry rates from the big players, the average bank savings rate is now just 0.13%, down from 0.06% in January, according to Bankrate.com’s September 14 weekly survey of institutions. The average rate on a one-year CD is now 0.77% as of September 19, compared to 0.14% at the start of the year.

But online banks and credit unions are looking to attract more deposits to fuel their booming lending businesses, McBride said. Therefore, they offer much higher rates and have increased them as benchmark rates increase.

So shop around. Today, some online savings accounts pay more than 2%. And the best performing 1-year CDs offer up to 2.50%. However, if you want to make a switch, be sure to only choose online banks and credit unions that are federally insured.

Another High Yield Savings Option

Given today’s high inflation rates, Series I Savings Bonds may be attractive because they are designed to preserve the purchasing power of your money. They currently pay 9.62%.

But that rate will only be in effect for six months and only if you buy an I-Bond by the end of October, after which the rate should adjust. If inflation goes down, the I-Bond rate will also go down.

There are certain limitations. You can only invest $10,000 per year. You cannot redeem it in the first year. And if you cash out between the second and fifth year, you’ll lose the previous three months of interest.

“In other words, I-Bonds don’t replace your savings account,” McBride said.

Still, they preserve the purchasing power of your $10,000 if you don’t need to touch it for at least five years, and that’s a big deal. They can also be particularly beneficial for people planning to retire in the next 5-10 years, as they will serve as a safe annual investment that they can tap into as needed during their early retirement years.

If inflation proves persistent despite higher interest rates, you might also consider investing in Treasury inflation-protected securities (TIPS), said Yung-Yu Ma, chief investment strategist. at BMO Wealth Management.

Equities: look for broad exposure and pricing power

The confusing mix of factors at play in markets today makes it difficult to tell which sector, asset class or company is certain to perform well in a rising rate environment, Ma noted.

“It’s not just rising rates and inflation, there are geopolitical concerns…And we have a downturn which may or may not lead to a recession…It’s a mix unusual, even rare, of several factors,” he said.

For example, financial services companies can do well in a rising rate environment because, among other things, they can make more money on loans. But in the event of an economic downturn, a bank’s overall lending volume could decline.

In terms of real estate, Ma said, “the sharp rise in interest rates and mortgage rates is challenging…and that headwind could persist for a few more quarters or even longer.”

How does inflation affect my standard of living?

Meanwhile, he added, “commodity prices have fallen but remain a good hedge given the uncertainty in energy markets.”

He remains bullish on value stocks, especially small caps, which have outperformed this year. “We expect this outperformance to persist over several years,” he said.

But generally 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 win, but not all.

That said, if you are considering investing in a specific stock, consider the firm’s pricing power and the consistency of likely demand for its product. For example, technology companies generally do not benefit from rising rates. But because cloud service and software providers publish subscription prices for customers, those can go up with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Bonds: go short

To the extent that you already own 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, i.e. one to three years. It’s because their prices fell further relative to long-term bonds, and their yields rose further. Usually, short-term and long-term bonds move in tandem.

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

Ma added that 2-year Treasuries, which are yielding almost 4%, “are attractive here because we don’t expect the Fed to go much beyond this level with short-term interest rates. term”.

Ammunition prices have come down significantly, yields have increased, and many states are in better financial shape than they were before the pandemic, Flynn noted.

Other assets that are likely to do well are so-called floating rate instruments from companies that need to raise cash, Flynn said. The floating rate is tied to a short-term benchmark rate, such as the federal funds rate, so it will rise each time the Fed raises rates.

But if you’re not a bond expert, you’re better off investing in a fund that specializes in exploiting a rising rate environment through floating rate instruments and other strategies. bond income. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF, which will hold an array of different types of bonds.

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

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