Hi there, my friend.
The Federal Reserve announced yesterday that it was raising interest rates by a quarter of a percentage point.
The Fed made the move to slow inflation. The theory behind it all is basically this:
If you increase interest rates, people are less likely to borrow.
If people borrow less, they’re less likely to spend on goods and services.
If people spend less on goods and services, there’s less demand for those goods and services.
If there’s less demand for goods and services, businesses are less likely to raise prices on those goods and services, or at least they won’t raise them as much.
Oh, if things were only that simple…
Economics rarely is. There’s the ongoing war with Iran. There’s a labor market with low unemployment yet it takes forever for many people to find work. There’s a president who wants rates lower, not higher. A million X factors like these mean there’s no guarantee this hike actually tames inflation, but make no mistake: Inflation control is the whole point.
“The plain fact,” said Fed chairman Kevin Warsh in his press conference yesterday, “is that inflation is too high and has been for too long.”
Amen to that!
Anyway, the Fed hasn’t raised rates since July 2023, and it is a big deal. (And they may do it one more time later this year.)
It is also both good and not-so-great news for consumers.
Let’s start with the good because, honestly, we sure could use it.
Why a Fed rate hike is a good thing
When the Fed raises interest rates, it generally leads to greater returns for savers. Interest rates on savings accounts, money-market accounts, CDs and other savings vehicles typically rise soon after the Fed makes its move.
Rates on these products are already high by historical standards, though not quite at the record levels seen a few years ago, but the Fed’s move yesterday means they’ll likely go higher in the near future. Just don’t expect your high-yield savings account to bump its rate up by a quarter-point overnight. When it comes to savings returns, banks don’t tend to be in as big a rush to raise yields as they are to lower them.
Why a Fed rate hike is not such a good thing
While rate hikes can be awesome for savers, they can absolutely suck for borrowers.
That’s especially true for those with credit card debt. Most credit cards in the US are so-called variable-rate cards. When the Fed raises or lowers rates, variable-rate credit cards’ APRs tend to move, too, typically by roughly the same amount and in the same direction as the Fed’s move. It takes some time, however. Expect your interest rates to rise sometime in the next couple of months.
Even worse, these higher rates apply to current credit card balances, not just future purchases. However, that’s not typically the case with installment loans such as personal loans and auto loans. Rates offered on new loans of those types are likely to rise, but the rate paid by those currently holding those loans should not.
When it comes to mortgages, the impact of a Fed rate hike isn’t as clear. Mortgage rates aren’t tied as closely to the Fed’s movements as credit card rates are, so there’s no guarantee that mortgage rates will rise just because the Fed raised rates. Still, if you’re in the market for a home or plan to be in the near future, it would be wise to plan to pay higher rates. Better to prepare for the worst and be pleasantly surprised than to find yourself unprepared.
Two things to do now that the Fed has raised rates
I’ve said it many times, and I’ll keep saying it: You have way more power over your money than you think. You can take steps that can have a far greater impact on your personal finances than any Fed rate move ever would.
Here are two of the most important things you can do right now, in the wake of the Fed’s rate increase:
Take steps to lower the interest rates on your debt.
You don’t have to take these rate hikes lying down. Refinancing and/or consolidating your debts with a 0% balance transfer credit card can be one of the most powerful moves you can make if you’re carrying credit card debt and can qualify for one. These cards can let you avoid accruing interest on the transferred balance for an average of 12 to 15 months and sometimes up to 21 months or more. You’ll likely need good credit (680 or higher) to get one, and there’s usually a one-time fee of 3% to 5% of the transferred balance, along with other fine print details you’ll need to understand, but they can be a powerful weapon in the battle against credit card debt. Just make sure you have a plan to pay that debt down during the 0% period and don’t see the new card as an excuse to spend. Otherwise, you’ve defeated the purpose of the whole thing.
Balance transfer cards aren’t the only options, though. If you can’t qualify for a 0% card, a low-interest personal loan can be a good choice, too. You can also call your lenders and negotiate your rates. LendingTree found that 84% of people who asked their card issuer for a lower interest rate on a card in the past year got one, and the average reduction was more than six percentage points. That’s way bigger than any move you’re ever likely to see from the Fed.
(Note: New subscribers to Ask, Save, Earn get a free guide called “3 scripts to lower your bills today” and one of the three scripts is for asking for a lower credit card APR. Check out the link below for a preview. And if you’re already a subscriber, pass it along to someone you love who might find it useful.)
You can also consider reaching out to an accredited nonprofit credit counselor, such as the National Foundation for Credit Counseling (NFCC). Along with helping negotiate with creditors, a good credit counselor can help you with budgeting and other steps to get your feet more firmly under you financially.
You’ve got plenty of options, but none of them will come knocking on your door. You’ve got to make the move. Chances are you’ll be glad you did.
Get yourself a high-yield savings account!
As I said earlier, rate hikes stink for borrowers but can be great for savers.
Many high-yield savings accounts (HYSAs) offer a 4% or higher annual percentage yield, far higher than the national average and leaps and bounds beyond what you’ll likely get with a traditional savings account at a megabank. Now, thanks to the Fed’s rate increase, those yields will likely rise, making 4% yields even more common.
You don’t have to wait for yields to rise before you jump in. HYSA rates aren’t fixed like a mortgage or auto loan. They typically move up and down with the Fed, and not just for new signups but also for current accounts. Banks don’t necessarily pass the increase along to savers immediately or in full, but if you’re still parking cash in an old-school savings account at a megabank, you’re leaving money on the table.
In other news… A better credit score can be worth tens of thousands of dollars!
Very little in life is more expensive than crummy credit. It can cost you tens of thousands of dollars over the years in higher interest rates, bigger fees and other costs.
This LendingTree report quantifies just how big the impact can be.
Borrowers juggling credit card, personal loan, auto loan and mortgage debt could cut their total interest payments by $42,950 over the life of their debt by raising their credit score from fair (580 to 669) to very good (740 to 799).
That’s massive savings!
To be fair, moving your credit score from fair to very good — passing through the “good” range along the way — is no small task and isn’t something that happens overnight. However, the report found that even more modest improvement can still bring big savings.
The big takeaway: Working to improve your credit is absolutely worth the effort. It may not be easy, and it may take longer than you’d like, but once you’re able to reap the benefits of that improved score, you’ll be glad you put in the work.
Until next time!
Matt