Here’s what borrowers should know about how federal funds rate increase four of the most common types of debt Americans carry, and what they can do soften the pain.
1. Credit cards
Since most credit cards have a variable rate, as opposed to a locked-in fixed rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and your annual percentage rate could rise within just a billing cycle or two.
The best thing to do is pay down debt before larger interest payments drag you down.
If you’re carrying a balance, switch to 0% intro APR credit card, Rossman advised. “You can still get up to 21 months with no interest on some balance transfers,” he said, such as the Wells Fargo Reflect, Citi Simplicity or Citi Diamond Preferred.
2. Mortgage rates
Mortgage rates are fixed and tied to Treasury yields and the economy, so they’ve actually come down from recent highs, largely due to the prospect of a Fed-induced economic slowdown.
However, adjustable-rate mortgages and home equity lines of credit are pegged to the prime rate and those rates are rising.
If you’re concerned about your payment going up, then you may want to consider a fixed-rate mortgage or a home equity loan, instead of an ARM or a HELOC, Channel advised.
3. Auto loans
Most car loans have fixed rates, so existing borrowers shouldn’t be impacted by rising rates, Rossman said.
Auto loans tend to track the 5-year Treasury rates, he added, which are influenced more by investor expectations than the Fed’s rate hikes.
Even if auto loan rates aren’t at historic highs, there’s no question inflation has hit vehicle prices hard. Experts say now might not be the best time to buy a new car, while some may want to consider a used car to save on costs.
When it comes to auto loans, “the best thing consumers can do to save money is to get their own financing before ever stepping foot into a car dealership,” said Erin Witte, director of consumer protection at the Consumer Federation of America.
To pad their profits, car dealerships sometimes mark up their interest rate above what a lender has agreed to accept, Witte said.
“Arranging your own financing can save you money by taking the secret markup out of the equation,” she said.
4. Student loans
Borrowers with existing fixed-rate federal student loans will not experience an increase on their interest rates, said higher education expert Mark Kantrowitz.
However, interest rates for federal student loans taken out next year will be higher, with a rate of at least 5.75%, Kantrowitz said.
Meanwhile, those with variable-rate private student loans will see their rates increase because of the Fed’s moves, he added.
Borrowers with existing variable-rate private student loans can refinance them into a fixed-rate private student loan, Kantrowitz said.
More generally, students and families should try to borrow less as education loans get pricier, Kantrowitz added.
*Article from CNBC
Written by Jwssica Dickler & Annie Nova