The last time the Federal Reserve raised interest rates, Barack Obama was a U.S. senator, but many prognosticators who watch the Fed say that a number of factors suggest we're due for a rate hike sometime within the next few months. If the Fed raises interest rates, it will mean a raise in the price of any new loan you take in the future as well as an increase in how much you pay every month on the adjustable-rate loans you already have. So, even if the discussion leaves you yawning, it's important to act quickly if you think the Fed will raise interest rates. That's because taking the right actions before a rate hike can save you thousands of dollars in interest payments after the rate hike. Here are some tips to protect yourself, save money and maybe even make a profit if interest rates go up this year:
If you have a high credit card balance, move it to a loan with a low, fixed rate.
Credit card rates have remained around 13 percent, on average, for several years, but a Fed hike would raise those rates. To make matters worse for people with sizable credit card debt, those rates compound quite quickly on a revolving account like your credit card.
One way to deal with your credit card debt is to move your balances from the cards you have now to a single high-limit card with a 0% introductory rate and pay it off in full before the introductory rate expires. However, using a credit card to pay off a credit card can be a dangerous strategy, because if you don't pay off the principle by the end of the introductory period, whatever you have left will start charging interest again, and perhaps at a high rate (pay attention to the fine print). You also run the risk of falling back into bad habits and filling your new card up to its limit again.
You can also look for the lowest fixed rate card that you can find and come up with a plan to pay it off. Destinations Credit Union offers a low-rate MasterCard with lots of benefits (ScoreCard rewards, no annual fee, no balance transfer fees, etc.).
If you want an even lower rate, you might consider a home equity loan or line of credit. Home Equity Lines of Credit (HELOCs) generally offer lower rates than Home Equity Loans, but the rate is variable so it may go up. Destinations Credit Union offers its HELOC at Prime minus 1% with a floor rate of 4%. Prime would need to increase by more than 1 3/4% before the rate on your HELOC will go up. Home equity loans have a low, fixed rate, so you can avoid an interest rate hike and save money in interest payments every month. While it might seem a little scary to borrow against your home equity, if you have accumulated significant credit card debt, your home might be the only source of wealth you can borrow against to cover it. The loan payments should be less than you're paying your credit card companies every month, so you'll find it much easier to make your payments and get out of debt.
If you're interested in using your home equity to get out of credit card debt, you can find out more by calling a loan officer at 410-663-2500.
If you were planning on buying a house (or refinancing) soon, it's time to make your move.
Fixed-rate mortgages will be unaffected by any interest rate hikes the Fed might employ, so if you think a rate hike is coming, get your mortgage now. The difference of a few percentage points in the federal rate could mean mortgage payments increasing by as much as hundreds of dollars per month for some homeowners. Avoiding that fee is as simple as getting the paperwork for a new home loan finished before a rate hike occurs.
If you wanted the extra few months to bulk out your down payment, or you weren't sure about refinancing this summer, it's time to sit down with a professional who can take you through the numbers and find out how much that indecision might cost. You can speak to a mortgage specialist with our underwriting partner, Financial Security Consultants, or follow this link to get pre-approved right now.
If you're investing, it's time to look at conservative options.
As long as the Fed kept interest rates low, it was a good idea to invest more heavily in stocks than investment products offered by financial institutions. Low rates meant easy loans to businesses and expansion was easy, so it was driving up stock prices. As rates go up, credit markets slow down, and expansion becomes less profitable for all those corporations in which you own shares.
At the same time, as the prime interest rate goes up, so does the return you'll enjoy on your money market account, savings certificates, or any of a variety of investment products you may have. Find out what we can do to put your money to work by checking out our insured deposit accounts, and if you're trying to get some money put together for retirement, don't forget about our IRA accounts.
No one knows for sure what Janet Yellen is going to do. Predicting the Fed's rates is a big-money business for a lot of powerful institutions. In the end, you're going to have to decide if you want to leave your money in places where a rate hike could increase your costs, or put it into more stable products. If you aren't sure what to do and want guidance, feel free to call or come by, we'd love to help you understand your options.