New York (CNN) — After two weeks of banking turbulence, the Federal Reserve on Wednesday continued its effort to control inflation by raising its key interest rate again. It is the ninth increase of this type in the last year.
That rise, which comes after US regulators took a series of confidence-boosting measures to support banks and ensure liquidity, will have an effect on consumers’ savings, loans, credit cards and investments. consumers.
“Returns on savings accounts and certificates of deposits (CDs) are the best in 15 years,” said Greg McBride, chief financial analyst at Bankrate.com. “But the average credit card rate is now at a record above 20%, car loan rates are at a 12-year high, and mortgage rates are still above 6.5%. It’s so important as always that savers and borrowers shop around to get the benefit of, or minimize the impact, of rising interest rates.
So here are some ways to manage your money to get the most out of the higher rates, while protecting yourself from additional costs.
Bank savings: noticeably higher rates, but not at the biggest banks
Higher rates mean your most liquid savings—those reserved for emergency expenses or short-term goals like a vacation fund or even a down payment you’ll need in the next 12 months—can finally grow after years of earning next to nothing. . Unless you’re still saving your money at the biggest banks that offer the lowest savings rates.
But online high-yield savings accounts now offer rates as high as 5%, well above the national savings account average of 0.23%, according to Bankrate.
“You’re leaving a lot of money on the table if you don’t switch to online banking,” McBride said.
Just make sure you choose one that is FDIC insured so you can rest easy knowing that your deposits of up to $250,000 will be protected in case the bank runs into trouble.
Among the highest-yielding certificates of deposit, there are one-year federally insured ones with rates as high as 5.15%, well above the current national average of 1.62%.
So, compare prices.
Another high-yield savings option
Given today’s still high inflation rates, Series I savings bonds They can be attractive because they are designed to preserve the purchasing power of your money. You can still get the current rate of 6.89% on the I bond if you buy it before the end of April.
That rate will stay in effect for six months if you complete your purchase before it resets on May 1. If inflation falls, the rate on the Series I bond will also fall.
There are some limitations: you can only invest a maximum of US$10,000 per year. You cannot redeem the bonus in the first year. And if you collect between years two and five, you will lose the previous three months of interest.
“In other words, I bonds are not a replacement for your savings account,” McBride said.
However, they do preserve the purchasing power of your $10,000 if you don’t need to touch it for at least five years.
They can also be of particular benefit to people who plan to retire in the next five to 10 years, as they serve as a safe annual investment that can be tapped if needed in the early years of retirement.
Your credit card debt: minimize rates
If you have credit card debt, you can expect an increase in the rate you pay within a few billing statements. When the federal funds rate goes up, various loan rates that banks charge their customers tend to go up.
Currently, the average credit card rate stands at an all-time high of 20.04% as of March 15, well above the average of 16.3% at the beginning of 2022, according to Bankrate.
Your best bet is to try to find a good balance transfer card with a 0% introductory rate and make a plan to pay off what you owe in the coming months before a high rate kicks in.
“Credit card rates are at record levels and keep rising. Supercharge your debt payment efforts with a 0% balance transfer offer, some of which last up to 21 months. That protects you from rate hikes.” rates over the next year and a half, and gives you a clear path to pay off your debt once and for all,” McBride said.
But first find out what fees, if any, you’ll have to pay (like a balance transfer fee or an annual fee), and what the penalties will be for late or missed payments during the zero-rate period. The best strategy is always to pay as much of the existing balance as possible, on time each month, before the end of the zero rate period. Otherwise, any remaining balance will be subject to a new interest rate that could be higher than what you had before, if rates continue to rise.
If you don’t transfer to a zero rate balance card, another option might be to get a relatively low fixed rate personal loan.
The median personal loan rate was 10.71% as of March 8, according to Bankrate. But the best rate you can get will depend on your income, credit score, and debt-to-income ratio. Bankrate Tip: To get the best deal, ask a few lenders for quotes before completing a loan application.
Home loans and mortgages
The 30-year fixed-rate mortgage has drifted away from 6% all year.
For the week ending March 16, it averaged 6.6%, down from 6.73% the week before. A year ago, the 30-year fixed rate was 4.16%.
Mortgage rates are not directly linked to Fed rate hikes, but rather to movements in the 10-year Treasury yield.
As for where mortgage rates are headed, just look at inflation. If inflation continues to fall, then mortgage rates are expected to fall as well. But don’t expect them to go back to 3%.
Whether they go up or down from here, getting a home loan may become more difficult as banks, wanting to bolster their defenses against possible adverse events like a run on the bank, may want to take less risk and preserve more cash. One way to do it: make loan requirements stricter.
If you’re buying a home or refinancing one, it may be a good idea to lock in the lowest fixed rate available.
That said, “rushing to buy a high-value item like a home or car that doesn’t fit your budget invites trouble, regardless of future interest rate behavior,” the company said. Texas Certified Financial Planner, Lacy Rogers.
If you already own a home with a variable-rate home equity line of credit, and you used part of it for a home improvement project, McBride recommends asking your lender if it’s possible to lock in the rate. your outstanding balance, effectively creating a fixed-rate home equity loan.
If that’s not possible, consider paying off that balance by taking out a Home Equity Line of Credit (HELOC) with another lender at a lower promotional rate, McBride suggested.
The variable rate on a home equity line of credit or a fixed rate on a home equity loan will increase because their formulas are directly tied to Federal Reserve rates. The median home equity loan was foreclosure at 8% as of March 15, well up from 6.19% in mid-March last year. Meanwhile, HELOC rates are currently averaging 7.76%, much higher than the 3.96% average a year ago, according to Bankrate.
Take advantage of better returns on your investments
It is not yet possible to predict how long interest rates will stay high or if there is more turmoil in store for the markets as a result of the recent banking collapses.
“The rate hike is part of the economic climate,” said Rob Williams, managing director of financial planning at Charles Schwab.
The same is true for periods of market downturns and inflation.
But history has shown that markets continue to grow over time.
So Williams said: “Focus on what you can control. If you’re a long-term investor, you can weather those storms.”
If you have a long-term investment plan, stick with it, he recommends. If you don’t have one, now is a good time to start. That includes saving regularly in your 401(k) and investing in a diversified portfolio with exposure to US and foreign stocks, plus bonds.
For anyone within five to 10 years of a big goal, like sending their kids to college or retiring, Williams recommends taking advantage of the fact that “fixed-income investments [por ejemplo, bonos y CD] they’re more attractive now than they’ve been for a decade or more.” His suggestion: Gradually increase your bond allocation. That reduces your overall portfolio risk and provides more stability to the income your portfolio can deliver.
In fact, Tony Roth, chief investment officer at the Wilmington Trust, suggests that given future uncertainties, any investor might consider reducing their portfolio risk a bit and taking advantage of higher bond yields by reallocating 2% to 3% of the stocks and high-quality corporate bonds with durations of no more than three to five years.
If you’re in a higher tax bracket and investing through a taxable account, you might consider tax-free municipal bonds, or a very short-term, low-cost muni money market fund, Roth suggested.
“Even if the bonds go down a bit, you’ll earn more in interest,” he said.
