Fed rate hike

What the hike means for borrowers, savers and home buyers

After keeping interest rates low throughout the first two years of the COVID-19 pandemic, the Federal Reserve announced its fifth rate hike this year, raising rates by three-quarters of a percentage point on Sept. 21. That follows increases in July, June, May and March.

That means rates on familiar financial products like savings accounts, mortgages and credit cards may rise. Interest rates have been low for so long that many consumers — millennials and Gen Z, particularly — haven’t really known a time when borrowing wasn’t cheap and savings vehicles didn’t pay next to nothing.

In general, higher interest rates are good news for savers and bad news for borrowers.

Savings accounts, in particular, have produced paltry returns in recent years. Certificates of deposit have not fared much better.

These historically low rates on savings products won’t jump higher overnight, but a higher federal funds rate can stimulate competition among banks and credit unions, and consumers may benefit from that. The best high-yield savings accounts tend to be among the first to raise their yields after a Federal Funds rate increase.

Interest rates on credit cards are typically not fixed, so they’re especially vulnerable to changes in the federal funds rate. If you’re carrying credit card debt, you can probably expect your interest rate — and also your minimum payment — to rise. That will make it harder to chip away at the debt.

But there are moves you can make to take the sting out of climbing credit card interest.

Reducing your credit card debt aggressively is a good idea no matter what rates do.

As interest rates rise, ensure you’re making at least the minimum payments on time, on every card. This will help strengthen your credit score over time, which will make it easier to qualify for lower-interest loans.

If you do have good credit, consider moving higher- interest debt to a balance transfer credit card. These offers may become scarcer if the Fed continues to raise interest rates and locking down a 0% intro APR for 12 months or more is a great way to make a significant dent in your debt. Paying down your balances will also improve your credit score.

If you plan to borrow money in the near future, you can expect to see higher interest rates on auto loans and personal loans. Double-check that your existing loans have a fixed interest rate and consider borrowing sooner rather than later to keep your interest costs down.

If you own a home, you may be able to borrow equity to pay off your credit cards. But be careful — home equity lines of credit, which often have variable interest rates, are also likely to be affected by Fed rate hikes.

Mortgage rates have risen ahead of each Fed rate hike, including this one, and they may go up even more through the end of 2022.

The Fed’s rate increases ended what had been a long run of historically low mortgage rates, in part due to the federal funds rate being so close to zero for roughly two years. These rates jolted upward by almost half a percentage point in January as the Fed’s intentions came into focus. Even after that initial increase, mortgage rates were still low by the standards of previous generations of homeowners.

Given how much interest rates can change the math of your homebuying budget, make sure to keep your mortgage preapproval up to date. You don’t want to make an offer on a home only to find out that it’s out of your price range at the current interest rate.

The Fed’s rate hike also affects the economy, and vice versa. These initial rate bumps are an opportunity to prepare yourself for a trend toward higher rates.

Reducing debt, especially when you’re paying a variable interest rate, will help you in a rising-rate environment. So will increasing your savings and staying focused on your long-term investing strategy, in spite of day-to-day fluctuations in the stock market.

If you manage your money carefully and the economy stays strong, rising rates could be a good thing for your wallet.

— Virginia C. McGuire, Kimberly Palmer