myFICO: How could the Fed’s interest rate hike affect you?
SAN JOSE, Calif.–(BUSINESS WIRE)–The Federal Reserve is expected to raise its federal funds rate several times over the coming year. Consumers don’t pay the federal funds rate directly, it’s the amount financial institutions pay for overnight loans. But increasing this rate can have a ripple effect on the economy as a whole. Here’s a closer look at what might happen, and how you might prepare or respond, from myFICO.
For more information on loans and credit, visit the myFICO blog at https://www.myfico.com/credit-education/blog.
Debts could get more expensive
When you pay off a fixed rate loan, such as a personal, car or mortgage loan, your interest rate will not change after you take out the loan. However, the variable rate loan rate could increase with the increase in the Fed funds rate.
If you have credit card debt or a variable rate installment loan, you may see your interest rate and minimum monthly payment increase. Pay off your credit cards like As fast as possible could help you save on interest and can improve your FICO® score.
You could also look into transfer debt to a new credit card with an introductory offer of 0% APR and paying it off while you don’t accrue interest. But consider the cost of potential balance transfer fees and whether you’ll actually be a winner.
You might also see rates on new fixed-rate loans start to climb, especially for personal and auto loans. Mortgage rates are not as directly tied to the federal funds rate, but mortgage rates have been rising. If you want refinance to a low-rate mortgage, you may need to act quickly.
Savings rates may not react as quickly
As borrowers may soon pay more for their debt, savers may not see rates on bank accounts increase as quickly.
Savings account rates aren’t tied to the federal funds rate, and banks won’t necessarily be rushing to increase the amount of interest they pay. Some banks may decide to keep rates low until they feel competitive pressure or decide they need to attract more depositors.
If you don’t earn much on your savings, you can turn to checking accounts and high-yield savings accounts. These pay higher rates but often require you to meet certain conditions, such as using your debit card a certain number of times and signing up for e-statements.
Many savers also buy I-bonds, a type of federal Treasury bond that ties its interest rate to inflation. They pay 7.12% at the start of 2022, and the rate is guaranteed to you for six months. This could be a good option for short to medium term savings, especially if inflation rates don’t come down. But read about restrictions and requirements before buying a bond.
Inflation and investment returns could slow
Inflation rates topped 7% for the first time since the 1980s, and you may have already noticed the rising costs of goods and services. One of the reasons the Fed raises its target rate is to reduce inflation by slowing the economy.
The idea is that higher interest rates will lead to less borrowing. In turn, individuals and businesses will not spend as much.
Investors may also notice that rising rates lead to lower stock returns. If companies have to pay more interest when they borrow money to grow their business, they won’t get as much profit for shareholders.
In addition, lower demand for products and services by businesses and individuals could lead to lower prices. However, change will not happen overnight, especially when supply chain disruptions continue to cause problems. In the meantime, you may need prepare your budget for higher costs.
Good credit can always help you get a lower rate
Although the federal funds rate and interest rates can have a direct impact on how much you have to pay for certain loans and how far your money will go, you don’t have much control over these rates. However, you can focus on improve your FICO score. Most lenders have a range of potential interest rates, and you may need good to excellent credit to qualify for the best rates.
myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do FICO scores. For more information, visit https://www.myfico.com/.