The Federal Reserve on Wednesday hiked its benchmark interest rate from 1.5% to 1.75%, the highest its been since 2008. The central bank also suggested that additional rate increases are coming later this year.
So what does this change mean for your wallet? While rising rates indicate that the economy is getting stronger, the bottom line is that borrowing will become more expensive. When the federal funds rate goes up, so does the interest rate at which banks borrow short-term money—and banks generally pass that increase on to consumers.
Here are three moves you should make in the coming months to both protect yourself from and take advantage of climbing interest rates.
1. Transfer Your Credit Card Balances to a Low Interest Credit Card
Credit card interest rates follow the trend of the federal funds rate, meaning the APRs on your credit cards will climb. The good news is that it sometimes takes a while for the rate increases to show up, so you have time to find a low-rate balance transfer offer to whittle down your credit card debt, because it’s only going to get harder to pay it off as rates increase.
(The balance-transfer deals are good right now, but they’re not expected to last which is why it’s important to move quickly.)
You’ll also want to pay down any credit card and other variable-rate debt as aggressively as possible. Eliminating your credit card debt will also have a positive influence on your credit scores. The higher your credit scores, the better access you will have to the lowest interest rates available.[Related Article: What Is a Low Interest Credit Card?]
2. Consider Refinancing HELOCs Into a Fixed-Rate Loan
If you have a home equity line of credit (HELOC), you can expect its rates to go up as well. That’s why it may be a good time to consider refinancing your HELOC into a fixed-rate home equity loan to lock in a rate that is not going to go up during the duration of the borrowing period.
And if you’re thinking about buying a new home, start shopping around for that mortgage. Other prospective home buyers will be getting in the game. “Historically what I’ve seen is when there are signs of increasing rates, the consumer tends to get off the fence,” Paul Diamond, chief executive of Diamond Residential Mortgage Corp., told the Wall Street Journal.
3. Take Advantage of Better Savings Rates
Of course, a rate increase is not all bad news. After years of earning next to nothing on savings accounts, savers are finally starting to see some decent returns. While the average interest rate on savings at banks is a paltry 0.07%, there are plenty of better deals available.
Shop around for the best deals on savings accounts at online banks, which tend to offer better deals than their brick-and-mortar counterparts. For example, Synchrony Bank offers an online savings account at 1.55%.
You may also want to consider putting some extra cash into a 12-month certificate of deposit (CD). Because interest rates are expected to continue climbing, a 12-month CD gives you access to a good savings rate, but allows you the flexibility to reinvest the money in a year when even higher rates will likely be available.