The Federal Reserve’s latest increase in short-term interest rates will have only a modest impact on consumer borrowing costs. But if the central bank continues to push up rates, which seems likely, then consumers should be adjusting their borrowing strategies now to minimize the impact later on.
As expected, the Fed raised its benchmark federal funds rate on Wednesday by a quarter point, to an upper limit of 1.25 percent. That’s still well below the historic average. But every increase in the rate—which is what banks and credit unions charge each other for loans—gets passed on to consumers in the form of higher rates on everything from credit card balances to car loans.
With that in mind, here’s how to prepare for the continued rise in consumer borrowing rates.
Mortgages. If you’re in the market for a new mortgage, or you have an adjustable-rate mortgage, rising interest rates could mean you’ll be paying more on your loan.
Although the Fed’s interest-rate hike doesn’t directly affect mortgage rates, it influences other factors—such as the 10-year Treasury bond—that do affect mortgages.
So what can you do? If you have an adjustable-rate mortgage, you may want to consider refinancing to a fixed-rate loan before long-term rates increase further, says Adrien Auclert, an assistant economics professor at Stanford University. And if you’re thinking of taking out a new fixed-rate mortgage, consider doing it sooner rather than later, when rates may be even higher.
Credit cards. Most credit cards come with variable rates. As interest rates rise, the annual percentage rate (APR) you pay on any credit card balance is also likely to increase.
Any time the Fed raises its benchmark rate, banks quickly follow by hiking their prime rate, which is used to determine many consumer rates, including those for credit cards. So check to see if your bank is raising its prime rate and charging more for credit card balances.
One way to avoid paying higher rates is to pay down your credit card debt. Another option is to transfer an outstanding balance to an interest-free balance transfer card, offered by many card issuers. Just be sure that you can pay off the balance before the promotional rate, which can be as long as 18 months, expires.
Student loans. If you take out a new fixed-rate federal student loan or you have a loan that charges variable rates, the amount you pay is likely to inch up. Higher rates may kick in soon—the government resets the rate it charges on new fixed and variable federal loans every July.
If you have a private student loan with a variable rate, your rate is also likely to rise.
As rates increase, you can avoid paying more by refinancing your loan and locking in a fixed rate. Not everyone can do this, though. A recent report from LendEDU, a marketplace for student loans, found that 43 percent of applicants were denied refinancing. Those with an average FICO credit score of 757 had a better chance of being approved.
Car loans. The cost of borrowing to buy a car will also rise. The rate increase today was small, but if future increases are on their way, car loans stand to become much more expensive.
There is an upside. If fewer people are buying cars, inventory levels could climb, which, in turn, could lead to the price of new cars falling.
Savings accounts. Although banks can be quick to raise rates on credit card borrowers, they may take the opposite approach when it comes to how much they pay in interest-bearing savings accounts. According to Bankrate, the average rate on a money market account is currently 0.11 percent—the same rate banks offered one year ago.
You could earn more by depositing your money in an online bank, where rates tend to be higher. You could also transfer a portion of your savings to a certificate of deposit, but you won’t have access to your funds for a period of time.
Stocks. When interest rates rise, stock prices often fall, partly because higher borrowing costs can reduce corporate profits and investors have less money to invest.
But that hasn’t been the case since the last interest-rate hike in March. Since then, the Dow Jones Industrial Average has been close to, or above, the 21,000 mark partly because of strong corporate earnings and some good economic signs: According to the Bureau of Labor Statistics, in May employers added 138,000 jobs and the unemployment rate fell to 4.3 percent—a 16-year low.