Read this if you’re worried about rising interest rates.
- The Federal Reserve recently raised interest rates and is expected to do so again this year.
- When rates go up, many aspects of your financial life can be impacted.
- Here’s how finance expert Suze Orman believes you should respond when rates rise.
In May 2022, the Federal Reserve raised interest rates. The Federal Reserve is the U.S. Central Bank and it sets the overnight right or benchmark rate. That’s the rate at which financial institutions can lend to each other. The rate increase that occurred was the largest since 2018 and was the second rate increase of 2022. Further increases are expected later in the year.
When interest rates go up, many aspects of your finances are affected. Variable rate debt becomes costlier, for example, and your savings account rate could go up. Mortgage rates have also been on the rise and the Federal Reserve’s actions will accelerate that.
During a time of rising rates, it’s especially important to make smart financial choices. Finance guru Suze Orman has some tips to help you do that, as she offered some advice on shoring up your financial situation back when the Fed raised rates in March. Here’s what Orman has to say.
Research your options if you have unpaid credit card debt
Since credit card debt is generally variable rate debt, rising rates means interest costs on your credit card balance will go up. As a result, Omran believes it’s important to “research your options” to try to keep your borrowing costs to a minimum.
She has two possible suggestions for trying to deal with rising rates. First, she suggests simply calling customer service and asking for a rate reduction. “Few people ask,” she said. “But surveys show that when they do, they typically do get a reduction.”
She also urges borrowers with a solid credit score to consider applying for a new credit card — ideally one with an introductory balance transfer offer. These offers typically give you the chance to pay 0% for a limited time after opening the card and transferring your existing credit card balance to it.
Reducing your rate to 0% can make it much easier to pay, especially compared with coping with a rate increase.
Be prepared for an increase in car loan rates and mortgage rates
Orman also warned that car loan rates will go up, either for new loans or for existing loans with variable rates. And the same is true for new mortgage loans and for adjustable-rate mortgages.
“If you are in the market for a new home, you need to budget in the potential for higher rates,” Orman said. “And if you’re about to make an offer, you might consider locking in your interest rate with your lender, to protect against it drifting even higher in the coming weeks.”
Don’t assume your savings account yield will increase dramatically
Finally, Orman says you shouldn’t get excited about the potential to earn more interest on your savings accounts. While your rate may “drift higher” over time, she said that “these shifts tend to be slow, and don’t fully reflect the size of a given Federal Funds hike.”
Instead of devoting more money to savings just because rates are rising, she believes the amount you have invested in a savings account should be determined by your financial need rather than hopes to make a profit.
Orman is spot on about these issues, and it’s worth heeding her advice if you have high interest credit card debt, as well as being prepared for mortgage rates to be higher so you can adjust your home-buying budget accordingly. If you accept the realities of what rising rates can mean for you, you can make smart choices so higher financing charges don’t damage your finances over the long run.
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