Rising interest rates can mean different things for borrowers and savers. Right now, it’s leaning in favor of people who want to save money. So, what’s the reason behind the federal rate increases? Also, how will it affect your wallet?

What’s the purpose of federal rate increases?

While the Federal Reserve already raised rates three times in a short period of time this year, it looks like there will likely be another increase coming soon. The reason for a fourth hike, which could be as much as three-fourths of a point, is tied to all of the rest of the increases. The purpose is to make it more expensive for people and companies to borrow money. This slows down the demand for big-ticket items people usually borrow money for. Things like cars, houses, furniture, and electronics. But, why would they want to make it MORE expensive to get a loan? By doing that, they’re hoping it will help the U.S. avoid a recession.

Recession talk aside, there are several bright spots to consider. No matter what the Fed decides later this month, the jobs market is positive, pay is still on the high side, and home prices in many U.S. markets are dropping. Although, mortgages are becoming more expensive. The Consumer Financial Protection Bureau (CFPB) is an arm of the Federal Reserve System. They want people to understand what the recent and future rate increases may mean for them. The interest rate adjustments often trickle into the economy in ways that could impact both borrowers and savers.

The cost of some credit cards is increasing.

Many major credit cards (VISA, Mastercard, Discover, etc.), and store cards (Old Navy, Macy’s, Amazon, etc.) offer revolving credit at a variable interest rate. So, the rate can vary. That also means the interest rate you have on existing credit products may go up if you have a variable rate.

How does that affect you?

You will pay more on your card balances. For example, data from CreditCards.com shows the average maximum APR on a new card offer has increased in the last few months, increasing to 25.55%. While those with very good credit likely won’t pay that much, many people who recently got a new credit card are now receiving APRs well above 20%.

What can you do about it?

  • At a minimum, pay off your statement balance every month. Ideally, you should pay the entire balance every month. However, if you can at least pay the statement balance, you won’t pay interest on your purchases.
  • Try to avoid using store cards unless you can pay them off when the bill is due. Store cards typically carry even higher interest rates than the major cards.
  • Look into an overdraft line of credit instead. The interest rate is half the national average APR for credit cards and it’s tied directly to your checking account. Right now, the rate is 12.00% APR.

Mortgage rates are going up.

Those shopping for a new home loan will likely pay more than people who locked in a lower annual percentage rate this time last year. Financial institutions often raise rates for new home loans after the Federal Reserve increases rates.

How does that affect you?

If you’ve been looking for a house for a while, take note of how the interest rate would change your payment. That might affect your maximum purchase price. Those who already have a fixed-rate loan should not see their payments change. Those borrowers will typically make the same payment as long as they continue to pay on time.

What can you do about it?

  • If you’re house-hunting, ask your realtor to do new payment calculations for you with the new rates.
  • Ask your mortgage company if they will lock in your rate when you get pre-approved.
  • The good news is that home prices are also falling, meaning you’ll pay less for the house itself.

Earnings on deposits could rise (slowly).

In a perfect world, people with money in savings accounts should expect to earn a higher interest rate when rates rise. The CFPB notes that customers at larger financial institutions may not see higher savings rates very quickly. Big banks can be slow to respond to federal rate increases.

What can you do about it?

Shop around for rates. Even as a small credit union we realize we may not always have the highest savings rates around. We try very hard to be fair and provide our members with the best savings AND loan rates that we can.

What you can do right now?

  • If you have balances on high interest rate credit cards or other lines of credit, look for ways to refinance the loan. You could transfer the balance to another credit card with a lower interest rate or look at a consolidation loan.
  • Make a plan to pay off your credit cards ASAP.
  • Talk with a financial coach. They can help you make a plan to pay off your debt and save money on interest.
  • If you have money sitting in a checking account, move what you can to a high-yield savings certificate or money market.

How can we help?

If you’re feeling stressed about finances, let us help. We always have your best interest at heart and will help you make a plan to save money in a rising rate environment. Our team is available M-F, 9am-4pm ET. Call, chat, text, or stop in! (315) 671-4000.