WASHINGTON – The Federal Reserve just gave consumers with revolving credit card balances their main New Year’s resolution: pay off that debt ASAP.
To fight inflation, the Fed is signaling that starting next year, it plans to raise its benchmark rate, which has hovered around zero percent. Any Fed rate hike may increase costs for some borrowers.
But don’t panic: any rate hike is likely to be small and gradual over time, said Mark Hamrick, senior economic analyst for Bankrate.
While the implications of possible rate hikes are significant for consumers, it doesn’t need to be a high level of fear.
“The cost of borrowing is going to go up, at least as far as we can tell, gradually and in stages, not sharply,” Hamrick said.
So what should you expect for the coming year? Here are some answers to questions you may have about interest rates in 2022 from the experts at CreditCards.com and Bankrate.
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Who will be most affected by the tariff increases in 2022?Any debt with adjustable interest rates, such as credit cards, could gradually become more expensive.
If you have an adjustable rate mortgage, or ARM, you may see the cost of your home go up.
If you were hesitant to refinance and it makes financial sense to do so, you might want to start that process and get a fixed rate mortgage now, Hamrick said.
What should I do if the rates rise?Pay off high-cost credit card debt as soon as you can, said Ted Rossman, senior industry analyst for CreditCards.com
If the Fed’s median projection is correct and the fed funds rate increases by 75 basis points, or 0.75%, next year that would likely raise the average credit card rate by 16.13% to 16.88%, said Rossman.
At 16.13% interest, a person making minimum payments on an average credit card balance of $ 5,525 would be in debt for just over 16 years and pay $ 6,160 in interest, according to Rossman.
At 16.88% interest, paying off the same $ 5,525 debt would take 196 months and cost $ 6,472 in interest, an increase of $ 312, Rossman calculated.
“Rate hikes certainly wouldn’t help, but the real problem is making only minimum payments for such a long time,” he said.
Rossman said one way to get rid of debt faster is to find an offer for a zero percent balance transfer credit card. The best offer an introductory interest-free rate for 15 to 21 months, according to CreditCards.com.
Even after paying the initial fee of 3-5% of the transferred balance, or $ 3-5 for every $ 100 in debt, you could save thousands of dollars in interest charges.
Opening a new credit card and possibly maxing it out could mean your credit score takes a hit, but you have to weigh that against the long-term benefits of digging into double-digit debt.
“I still think it might be worth it, but really only if you progress, not if you see it as some kind of shell game to just, like, throw the box down the road,” Rossman said. “It’s really hard to build long term wealth if you pay such a high interest rate month after month. “
Do I have to rush to buy expensive items, like a car, before the prices go up?Don’t let impending interest rate hikes influence your buying decision. The cost of borrowing is just one factor you should consider. You have to take into account the purchase price.
In the year ending November 2021, used car prices rose 31.4% and new car prices rose 11.1%, according to the Bureau of Labor Statistics. Since the start of the pandemic, used car prices have increased by 47.6% and new car prices by 12.6%.
“Any increase in auto loan rates has a very minor effect on monthly payments, so that’s no reason to change your schedule,” said Greg McBride, chief financial analyst at Bankrate. “The limited availability and high prices of what is on car lots will continue to be a big strain on the budgets of car buyers. “
Rather than just focusing on the interest rate, McBride said, a more effective step for potential car buyers is to make sure their credit is in peak condition and to shop around and get the best deal on. the vehicle and the financing.
Should I be worried about how rising rates might affect the stock market?“More stock market volatility is very likely as the Federal Reserve starts to raise interest rates, but don’t succumb to short-term volatility and make big changes to your 401 (k) or instinctively to other investment portfolios, ”McBride mentioned.
As McBride pointed out, the reason the Fed is considering rate hikes is because the economy is doing better, more people are working, and consumers are spending.
“At the end of the day, these are all good things for company earnings and stock prices, so it’s important to hang in there and maintain a long-term focus if things go wrong in 2022,” a- he declared.
What will the rate hikes mean for savers?Any rate hike by the Fed will likely be small and not significantly improve what you earn on your savings. This means that, yes, you are still going to receive a pitiful amount of interest.
Nevertheless, continue to accumulate your savings. Don’t be put off by the low rate, as this is cash you need to be readily available in a financial emergency.
Michelle Singletary is a personal finance columnist for the Washington Post. His column is broadcast on Sundays.