Here’s how to prepare for a 50 basis point rate hike by the Fed

Consumers are spending more to keep up with the rising cost of living, and things may get worse before they get better.

“Although wage growth was the best in decades, it was outpaced by increased household expenses,” said Greg McBride, chief financial analyst at Bankrate.com. “With inflation at a 40-year high, that affected everyone.”

After the Federal Reserve hiked interest rates for the first time in more than three years, Chairman Jerome Powell pledged a crackdown on inflation, which he says is threatening an otherwise strong economic recovery.

The central bank is now expected to hike rates by half a percentage point at its meeting this week.

“The Fed is behind the curve, they have to catch up, and they’re not going to do it in small increments,” McBride said.

The move will coincide with an increase in the federal funds rate and will immediately raise funding costs for many forms of consumer borrowing.

Consumers will be among the first to see their short-term borrowing rates, particularly for credit cards, soar.

Since most credit cards have a variable interest rate, there’s a direct link to the Fed’s benchmark, so your APR goes up with every move by the Fed, usually within a billing cycle or two.

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

With 15-year and 30-year mortgage rates fixed and tied to Treasury yields and the economy, homeowners won’t be immediately hit by a rate hike. However, anyone buying a new home is already paying more for their next home loan (the same goes for car buyers and student loan borrowers).

“The projected increase has already been built into mortgage rates,” he said Holden Lewis, home and mortgage expert at NerdWallet.

The average interest rate on 30-year fixed-rate mortgages rose to 5.37% last week, the highest since 2009, and is expected to rise further throughout the year.

Here are three ways to stay ahead of rising interest rates.

When interest rates are rising, the best thing to do is pay off debt before larger interest payments drag you down.

When you look at the debt you owe, pay off the debt with the higher interest rates 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 just over 16%, well above almost any other consumer loan, and could climb to 18.5% by the end of the year — which Ted Rossman says would be an all-time record. Senior Industry Analyst at CreditCards.com.

If you have a balance, try calling your card issuer to ask for a lower interest rate, consolidate and pay off high-yield credit cards with a lower-yielding home equity loan or personal loan, or switch to an interest-free credit card with balance transfer.

“Zero percent transfer cards are alive and well,” Rossman said, adding that cards that offer 15, 18 and even 21 months with no interest on the transferred balance “are a great way to save hundreds, maybe thousands of dollars.” to save on interest.”

While the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate. As a result, the savings account rate at some of the largest retail banks is hovering near bottom, currently averaging just 0.06%.

Since the inflation rate is now significantly higher, all savings lose purchasing power over time.

“The worst thing would be if your borrowing costs go up but you don’t benefit from a higher savings rate,” said Yiming Ma, assistant professor of finance at Columbia University Business School.

Thanks in part to lower overhead costs, the average online savings account rate is often higher than the rate at a traditional bank.

Meanwhile, prime yield CD rates average more than 1% — even better than a high-yield savings account.

The CDs with the highest returns tend to have higher minimum deposit requirements than an online savings account and require longer terms. That means money isn’t as accessible as it is in a savings account.

“They don’t put money in emergency savings for the prospect of big returns,” McBride said. “It’s the buffer between you and 17% credit card debt when an unplanned expense arises.”

“However, if you have savings, think of deposits that can be put aside,” Ma added. “Now is the time to take advantage of this rate hike.”

In general, the higher your credit rating, the better for you.

Borrowers with good or excellent credit ratings (generally anything above 700 or 760 respectively) qualify for lower interest rates, and that will go a long way when funding costs rise.

For example, according to Francis Creighton, president and CEO of the Consumer Data Industry Association, reducing a new car loan by one percentage point can save up to $50 a month.

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

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

The best way to increase 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, such as: B. Checking your credit report for errors, Creighton advised.

“You want to go into inflation in the strongest position you can be.“

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