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The days of rock-bottom interest rates have long been over — and consumers are facing money dilemmas they haven’t had to debate for years.
The Federal Reserve didn’t raise interest rates at its September meeting, with officials voting to keep interest rates unchanged in their current target range of 5.25-5.5 percent. But that did little to alter the current borrowing environment. The Fed’s key interest rate hasn’t been this high since early 2001.
Consumers have their wallets to show for it. Car loans haven’t been this pricey for 15 years, and before the Fed’s latest inflation fight, credit card rates had never been this expensive. Even forms of consumer credit once seen as a lower-cost debt — such as home equity lines of credit — are now hitting the highest level in over two decades.
There are also some bright spots to paying more for money this year. For starters, savers are seeing the best yields since 2007 if they shop around, Bankrate data shows. It’s also now easy to find a yield that eclipses inflation if you keep your cash in a high-yield savings account, meaning your money isn’t losing purchasing power just by sitting on the sidelines.
But as the failures of three major banks this year illustrate, higher rates bring economic consequences. The U.S. economy is looking brighter lately, but the ultimate fear is whether more monsters are hiding around other corners.
Fed officials could raise rates more this year if inflation accelerates — or even stays stickier for longer than expected. Price pressures have cooled sharply since the highs of last summer, hitting a 3.7 percent annual rate in August. Yet, inflation, when excluding food and energy, rose by a hotter 4.3 percent pace — much less impressive to Fed officials, who officially target a 2 percent level.
Economists in Bankrate’s latest Economic Indicator poll are split on whether inflation will hit that level by the end of 2024 or 2025.
There is debate about whether the Fed is done raising interest rates or not, but one thing is for sure – rates are unlikely to come down in any meaningful way for quite some time.— Greg McBride, CFA | Bankrate Chief Financial Analyst
All of that underscores the importance of getting a handle on your finances, especially to ensure you’re well-positioned to tackle the one-two punch to your cost of living that is high interest rates and elevated inflation.
Here’s your 11-step plan for taking charge of your wallet after the Fed’s latest rate decision.
1. Get a snapshot of your personal finances
Anytime the Fed raises rates, consumers should get an idea of where they’re at with their personal finances, including how much debt and savings they have.
Print out statements from any account housing liquid cash — or money you could withdraw without penalty. Those are most likely savings accounts, but they could also be funds in a money market account or no-penalty CD. Even better, note each account’s annual percentage yield (APY).
Next, list your debt, including your outstanding balance and the annual percentage rate (APR) you’re charged. Keep tabs on whether that debt has a fixed or variable rate, and note how much interest you pay per month.
Then, keep track of the income and expenses flowing in and out of your budget each month.
The goal of taking a hard look at your personal finances is to hopefully inform you of how fragile you might be in a rising-rate environment. You might also be able to identify easy budget cuts or debt to eliminate. Individuals who live outside of their means and borrow to fund their expenses will feel squeezed in a rising-rate environment.
2. Know what’s good debt and bad debt — and eliminate the latter
Consumers with variable-rate and high-interest debt should act fast while they still can. Those borrowers are hit the hardest in a high-rate environment, and 11 rate hikes over an 18-month period have brought punch after punch.
“Anything you can do to pay off your balances faster and make adjustments in your budget, so you don’t have to rely on your lines of credit and carry debt from month to month, that’s the best strategy,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
High-interest debt commonly comes from a credit card. Even when the Fed’s rate held near zero, the average credit card rate hovered slightly higher than 16 percent, according to Bankrate data. If you don’t pay off your balance in full each billing cycle, that’s likely costing you hundreds — if not thousands — of extra dollars a month.
Consider consolidating your outstanding balance with a balance-transfer card to help chip away at your high-cost debt, and shop around for the best offer on the market. Most cards start borrowers with a rate as low as zero percent for a specified number of months before transitioning them to the regular APR.
Americans, however, might want to act fast if they’re going to secure a 0 percent introductory rate. Balance transfer offers often dry up during tougher economic times.
Meanwhile, one benefit to tracking how much you pay in interest each month is, it can also help you determine whether you’d save money by transferring your debt — a process that comes with fees.
As rates rise, consumers would be wise to eliminate any variable-rate debts by refinancing into a fixed rate.
“You don’t want to be a sitting duck for higher interest rates on your credit card or home equity line of credit,” Bankrate’s McBride says. “Fixed-rate debts like mortgages and car loans that are low and mid-to-single-digit rates — there’s not a whole lot of incentive to pay ahead” when inflation is higher.
That’s because the relatively low-cost debt can be a strong hedge against inflation. Simply put, you might be better off putting that money toward other avenues that meet your financial goals — such as saving or investing — than paying it off.
3. Shop around for the most competitive borrowing rates
Shopping around will be one of the most important steps a consumer can take in a high-rate environment.
Mortgage rates have been eclipsing 7 percent since the beginning of August, most recently hitting 7.41 percent on Sept. 13, according to Bankrate data.
The new landscape signals an end to the record-low refinance rates of the coronavirus pandemic-era — and even the lower rates homeowners were accustomed to in the decade after the financial crisis. Yet, some lenders might be more inclined to offer better deals than others to separate themselves from the competition.
The Fed doesn’t directly impact mortgage rates, which are instead pegged to the 10-year Treasury rate. Yet, the same market forces influencing the Fed often steer that benchmark yield.
“If the Fed overcorrects and the economy starts to slow, then mortgage rates will come back down,” McBride says. “Be careful what you wish for because an economic slowdown — or worse, a recession — isn’t fun for anybody.”
Another avenue where noting rates might be prudent: private student loan borrowers. Doing the same kind of comparison shopping might help you score the lowest rate possible before interest rates start their ascent again.
Federal student loan borrowers, however, will want to think twice about refinancing their debt into a private loan. Doing so could mean giving up on important perks, such as hardship or unemployment forbearance, income-driven repayment plans and other major programs for federal student loan borrowers. Federal student loans also now mostly come with fixed rates.
4. Work on boosting your credit score
If there’s any factor that inhibits consumers’ ability to borrow cheaply more than the Fed, it’s their personal credit scores. Most of the time, financial companies save the best rate for the so-called “safest” borrowers: those with good-to-excellent credit scores and a reliable credit profile.
Companies may even grow pickier about who they approve for loans. A New York Fed report released July 17 showed rejection rates for any kind of credit — including mortgages, credit cards and auto loans — hit the highest in five years. Rejection rates were highest for individuals with credit scores below 680.
Improving your credit score could help you save throughout all aspects of your borrowing life, including on auto loans and mortgages.
To have the best credit score possible, concentrate on making all of your debt payments on time and keeping your credit utilization ratio as low as possible — the two factors with the biggest influence on how your rating is calculated.
5. Keep up frequent communication with your credit card issuers
Issuers might be inclined to give you a new APR if your credit score improves, NFCC’s McClary says. If they don’t, you’ll at least know it’s time to shop around or take advantage of a balance-transfer card.
It leads to another crucial step in your financial plan: opening up the channels of communication with your credit card issuer.
“It’s sad how few people talk to their creditors when times are good because it’s when you have those conversations, you realize a lot of really great things you could be doing to save even more money,” he says.
When the Fed has been tightening rates, it’s worth reviewing your cardholder agreement and making sure you know how your issuer calculates your APR.
Typically, rates on variable loans change within one to two billing cycles after a Fed rate hike — meaning some borrowers may still see their rates edge up as lenders catch up to the Fed’s 11 other rate increases. Yet, any rate increase is up to the creditor, meaning it’s not outside your issuer’s purview to wait for the Fed to hike rates.
Credit card companies, by law, have to give cardholders a 45-day notice if they’re going to increase their cardholder’s interest rate.
“Credit card companies do have some latitude in deciding when and how much to increase a cardholder’s interest rates within the confines and constraints of the Card Act,” McClary says. “It’s in those areas that the details are going to be in the cardholder agreement.”
6. Don’t let inflation keep you from saving
Elevated inflation might make consumers hesitant to sit on large piles of cash out of fear that their money could lose some of its purchasing power, but experts say it’s more important now than ever given recession risks and economic uncertainty.
It’s also easier than you may think to now find a savings rate that beats those price pressures. All 10 banks ranked for Bankrate’s best high-yield savings accounts in September offer yields higher than headline inflation.
A crucial part of any financial plan is having cash for emergencies. Experts typically recommend storing six months’ worth of expenses in a liquid and accessible account. But even if you can’t afford to stash that much away, any little bit can help protect you from accruing high-cost credit card debt when an unexpected expense pops up.
“Building a rainy day fund is really important, even if the interest rate you’re earning on those funds is lower than the inflation rate,” says Mike Schenk, deputy chief advocacy officer at the Credit Union National Association. “Put a little bit into a savings account over time, and before you know it, you’ll have a chunk of savings that can give you a better night’s sleep at the very least.”
7. Look around for the best savings yields
Be prepared to shop regularly for the best savings yields on the market, even if it means moving your funds to a different bank to capitalize on a better return.
Typically, online banks can reward their depositors with higher yields because they don’t have to pay the overhead associated with operating a brick-and-mortar financial institution.
The 10 best high-yield online banks ranked for September 2023 are currently offering an average yield of 4.6 percent, almost 10 times the national average and 400-500 times higher than yields at Chase and Bank of America. Those banks offer yields as high as 5.20 percent and as low as 4.25 percent, all of which are beating eclipsing inflation.
You shouldn’t sacrifice liquidity or FDIC insurance for yield chasing, especially if you’re keeping your emergency fund in that savings account. But if an account on the market offers terms that fit your financial needs, you may want to consider switching accounts.
“Every month, a different bank is going to have the best rate,” says Gary Zimmerman, CEO of MaxMyInterest. “Since an FDIC-insured savings account is a commodity, it doesn’t really matter which bank. The whole idea of, ‘I’m going to pick a bank,’ That doesn’t make any sense.”
8. If you already have an emergency fund, consider locking in a long-term CD
Savings yields fluctuate, and banks often don’t wait for a rate hike or rate cut to adjust how much they’re paying depositors in interest. Even the mere expectation of the Fed reducing rates in the near-future can send yields tumbling.
One way to make sure you can take advantage of higher rates for a longer time horizon? Consider locking in a longer-term CD, particularly one with a 2-year or 5-year maturity.
Even the mere expectation of the Fed reducing rates in the near-future can send yields tumbling. The highest-yield 5-year CDs are still currently paying 4.65 percent a year in interest, but 2-year CDs are offering consumers an APY as high as 5 percent, after offering 5.1 percent just last April, according to Bankrate’s rankings.
If you don’t mind locking away your cash for the entire length of the CD, it might be a strong — and safe — way to add some yield to your portfolio of investments, including for retirees.
“With rates still rising and inflation now declining, it is the best of both worlds for savers,” McBride says. “Consider locking in longer-term CDs, which are peaking now.”
9. Start recession-proofing your finances
Saving is crucial right now because the U.S. central bank could end up slowing down economic growth, or worse — causing a recession. Even with the risks of a recession over the next 12 months hitting the lowest level in a year in Bankrate’s latest economists’ survey, the odds are still an elevated 59 percent.
“Raising interest rates is putting the brakes on the economy,” McBride says. “The harder they press the brakes, the sharper it’s going to slow down. The cumulative impact of ongoing rate hikes is where you’re likely to see a slowdown in economic activity and the labor market.”
Recessions aren’t always as severe as the coronavirus pandemic, the Great Recession or even the Great Depression almost a century ago. They do, however, mean increased joblessness, reduced hiring job security, as well as market volatility.
That means it’s important to start thinking about how you’d stay afloat in a recession. No matter how strong the U.S. economy is, it’s always important to live within your means, eliminate your debts and make sure you can cover a period of joblessness.
10. Think about your career and income opportunities
When the cost of living rises or the economic outlook seems shaky, one of the best investments you can make is in yourself. Think about ways to increase your earnings opportunities over your lifetime, whether by getting more training, education or increasing your skills. Joblessness is typically lower for those with a bachelor’s degree or higher — even during recessions, according to data from the Labor Department.
“You have to be looking down the road because what’s far more impactful to household finances than an increase in interest rates is a job loss or a significant decline in wealth,” McBride says. “Those are the types of things that happen in a recession.”
11. Tune out market volatility if you’re investing for the long term
High rates typically cause market dysfunction. That’s partially by design: More expensive borrowing costs tighten financial conditions, soaking up extra liquidity in the marketplace.
Case in point: Last year, the S&P 500 plunged 20 percent, the worst year for the major stock index since 2008.
Markets, however, have been looking past higher rates lately. The S&P 500 is up 16 percent since the start of the year and is only now down about 7 percent from its all-time high. But those gains may not last forever, especially if the economy does end up looking like it’s about to take a turn.
Still, the volatility shouldn’t mean anything for long-term investors, especially those who put money into the markets through a retirement account. If you’re investing over a time horizon that spans decades, you’ll no doubt have to endure both booms and busts.
“Investing does make sense because you will more than likely have to take a little bit of risk to earn returns that are higher than the inflation,” CUNA’s Schenk says.
The failures of SVB, First Republic and Signature Bank illustrate that something can always break when rates start to rise — but those cracks will be for nothing if the Fed can’t get control of inflation first.
Defeating rapid price pressures has been the Fed’s ultimate goal with raising interest rates. The hope is that it can gradually slow the economy without pushing it toward a recession. For U.S. central bankers, however, that might be one of the most difficult jobs yet — even if pausing rate hikes is a form of risk management. Monetary policy will keep putting the brakes on the economy as long as borrowing costs stay high.
“Whether the Fed raises interest rates further or not, borrowing costs are the highest in years,” McBride says. “Between a robust job market and the rate of inflation more than double the 2 percent target, the recent economic data makes one thing clear — the Fed is nowhere close to cutting interest rates.”