The Fed could become more aggressive in fighting inflation. How to prepare

For most Americans, the soaring cost of living is weighing heavily on their wallets.

“Wage growth has failed to keep pace with the dizzying pace of rising prices, which the Federal Reserve has effectively identified as ‘monetary policy’s enemy number one,'” said Mark Hamrick, senior economic analyst at Bankrate.com.

After the Fed raised interest rates for the first time in more than three years, Chairman Jerome Powell pledged strong action on inflation, which he said jeopardizes an otherwise strong economic recovery.

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Now, the central bank is expected to raise rates by half a percentage point at each of its May and June meetings.

Each move will correspond to a rise in the prime rate and immediately drive up financing costs for many forms of consumer borrowing.

What to know about rising interest rates

Consumers will see their short-term borrowing rates, particularly on credit cards, among the first to jump.

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark, so your APR will increase with every move the Fed makes, usually within a billing cycle or two. .

Adjustable rate mortgages and home equity lines of credit are also indexed to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.

Since 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, homeowners will not be immediately affected by a rate hike. However, anyone buying a new home will pay more for their next home loan (the same goes for car buyers and student borrowers).

“Mortgage rates have been rising steadily for a month, pushed higher by inflation and the Federal Reserve’s efforts to control inflation,” said Holden Lewis, real estate and mortgage expert at NerdWallet.

“Just a few months ago, most forecasters were expecting rates to rise all year but not hit 5%,” he added. “Well, we’re approaching 5% just in the quarter of the year.

“Rates will continue to rise until investors see inflation come down.”

Here are three ways to stay ahead of rising rates.

1. Pay off the debt

When rates rise, the best thing you can do is pay off your debt before bigger interest payments drag you down.

When looking at the debts you owe, whenever possible, pay off the higher-interest debt first, said Christopher Jones, chief investment officer at Edelman Financial Engines – and “credit cards tend to be by far the highest.”

In fact, credit card rates are currently around 16%, significantly higher than almost all other consumer loans.

If you have a balance, try calling your card issuer to ask for a lower rate, switch to a zero-interest balance transfer credit card, or consolidate and pay off high-interest credit cards with a low-interest mortgage or personal loan. to lend.

“Even if you have to borrow a little against your home loan, you’ll at least pay a lower interest rate,” Jones said.

2. Postpone big purchases

“One of the questions people should be asking is ‘is it a good time to make a big purchase?'” Jones said. “It’s going to cost more to buy the thing and cost more to finance.”

For big-ticket items, like a house or a car, “it might make sense to defer,” he said.

Although mortgage rates are rising, the cost of buying a home is rising even more, as home price appreciation more than doubled last year.

The same goes for car purchases. New and used car prices continue to rise amid strong demand and tight inventories and show no signs of slowing down anytime soon.

3. Boost your credit score

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Generally, the higher your credit score, the better off you are.

Borrowers with good or excellent credit (usually above 700 or 760, respectively) will be eligible for lower rates and that will go a long way as the cost of finance increases.

For example, cutting a new car loan by 1% can save up to $50 per month, according to Francis Creighton, president and CEO of the Consumer Data Industry Association.

On a 30-year mortgage, even getting a slightly better rate can mean hundreds in monthly savings.

“For someone trying to make ends meet, it’s real money,” Creighton said.

The best way to boost your credit score is to pay your bills on time or reduce your credit card balance, but there are even simple fixes that can have an immediate impact, like checking your credit report for errors, advised Creighton.

You want to enter the inflationary period in the strongest possible position.

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