How the fed interest rate hike could impact you

Published: Mar. 22, 2022 at 4:14 PM CDT
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MEMPHIS, Tenn. (WMC) - The federal reserve increased interest rates for the first time in years last week and more increases are expected to come throughout the year.

Finance experts say this could impact everyone with savings accounts, mortgages, credit cards and more.

Kimberly Palmer, a personal finance expert with NerdWallet, said anytime the federal reserve does this, any consumer debt you carry could become more expensive.

“That affects people most commonly when it comes to credit card debt. Credit cards are generally at a variable rate of interest and that means that the interest rate fluctuates and so when rates are rising, it becomes more expensive,” she said.

It also impacts potential homeowners. Palmer said even a small percentage change means you’re paying more every single month.

For example: If you’re planning on buying a home, with a 30-year-mortgage at a rate of 3.5%, a $200,000 loan yields a monthly payment of $898. A rate increase of just 1% (4.5%) bumps that to $1,013 a month, adding about $40,000 in interest over the life of the loan.

Palmer said homebuyers should do some digging before committing to a loan rate and factors such as a strong credit score can help secure lower rates.

“The most important thing is to shop around and to not just take the first offer that you see. You want to make sure that you really do some comparisons and get the best deal for you.”

If you’re big on saving money, there is a silver lining to the rate increase.

“The interest rates or the yields on savings accounts are expected to go up as well. So your money can earn more as it’s just sitting there in your bank account,” Palmer said.

With these impacts in mind, Palmer recommends making a plan to pay off your debt and if you have fixed-rate debt, lock those rates in.

“Debt like mortgages, auto loans, you want to try to lock in lower rates as soon as possible since now we are in an environment where not only do we just have a rate hike, but we expect more to come as the year goes on.”

There are a couple of ways consumers can think about paying off debt, according to Palmer.. One way is to pay off the debt with the highest interest rate first to pay as little as possible in interest. She also says other people are motivated by paying off their smallest debt first.

“That can really give people momentum as they start to pay off those small amounts of debt. Maybe you have an array of credit cards, you want to get rid of the ones with the smallest debt first, unload that turn your attention to the next one. So it’s pretty much a personal choice how you go about paying off debt, but the most important thing is to just really come up with a plan.”

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