7 things you can do to lessen the sting of higher interest rates

It’s easy to watch interest rates rise and only see the potential for personal financial crises. Credit cards will charge more. It will be more difficult to obtain or refinance a mortgage. The average American has just over $90,000 in debt, and that debt could be harder to clear if their interest rates go up.

But, as Tara Tussing Unverzagt, a financial planner from Torrance, Calif., notes, rising interest rates can provide opportunities.

“I seem to be the only person excited about rising interest rates,” she says. “If you’re not in debt, having higher interest rates means your savings, like money market funds and bond investments, are paying more. That’s exciting.”

All is not gloomy. While rising interest rates certainly pose challenges, financial planners and experts recommend reducing debt and taking advantage of immediately available opportunities to grow your savings. Here’s what they recommend.

1. Study your rates

First, review your loan statements and determine the types of debt you have. The loans have fixed or variable interest rates. With a few exceptions, fixed rate loans do not change. If you have a mortgage or personal loan at a fixed rate of 5%, the rate remains at 5% for the entire loan, except penalties for late or late payment. Fixed rate credit cards are rare and not really fixed; they can raise rates with 45 days written notice. Really, however, the bottom line here is that you don’t have to worry about fixed rate loans. They won’t change and rising interest rates make it less likely you’ll be able to shop around for a better rate.

Variable rates, however, you need to keep a close eye on. Variable rates rise and fall based on benchmark interest rates, primarily the federal funds rate set by the Federal Reserve System. Mortgages, car loans, student loans taken out before July 2006 and, especially, credit cards can have variable rates. The average credit card interest rate is currently 18.97%. But Howard Dvorkin, president of Debt.com and personal finance guide, predicts rates will rise by more than 20%.

“When interest rates went down, some credit card companies never lowered their interest rates,” he says. “Their cost of lending has gone down significantly. It was close to zero. But they never reduced it. They just took all that money for profit. Now they have an excuse to raise rates. “Well, interest rates have gone up, so we’re going to raise our interest rates.”

2. Deal with credit card debt early and often

Currently, the average US credit card balance is $5,525. If this is your situation, time and compound interest are your biggest enemies. Defeating them requires sacrifice. You need to attack credit card balances aggressively, starting today. If you pay $100 a month for a balance of $5,525 earning 20% ​​interest, it will take 13 years and cost almost $10,000 in interest to pay off that card. It assumes you stop shopping on it, which almost no one ever does. Increasing it to $110 in monthly payments reduces that amount by almost four years and about $6,550 in interest.

“If you have unpaid credit card bills, never pay the minimum payment,” Dvorkin says. “Pay triple the minimum payment. The minimum payment is designed to keep you in debt. That’s the point. Seventy percent or more of your minimum payment is designed to pay interest, and you only pay 30% of your minimum payment on principal. »

3. Use balance transfers wisely

Balance transfers can be a great way to consolidate debt and secure a lower interest rate. But beware. “If you’re considering a transfer with a zero rate offer, make sure you know what you’re getting into,” warns Dvorkin.

Credit card companies don’t do these 12-18 month interest-free deals out of the goodness of their hearts. Proceed with caution. You will probably have to pay a transfer fee, 2-5% of the balance. A 5% fee on a balance of $5,525 is $276.25. It’s a tough pill to swallow, even if it’s far less than you’d pay in interest over time. The bigger issue, however, is how you’re going to handle your suddenly refunded credit card. It is imperative to resist the temptation to use it for purchases. If you keep racking up charges on the original card and don’t substantially pay off the transferred balance on the second, you’ll end up worse off than before.

4. Lock down a HELOC ASAP

If you own a home, Dvorkin recommends establishing a home equity line of credit, aka a HELOC, as soon as possible. “Build it now so you don’t have to run around like crazy to build one later,” he says. With higher rates driving down mortgages and refinances, banks are eager to lend.

HELOCS are revolving sources of funds that use the equity in your home as collateral, which means the terms are more favorable than unsecured loans. Dvorkin recommends opening a HELOC quickly but waiting as long as possible to withdraw the money. Yes, you can pay off a high interest credit card with a relatively low interest withdrawal from a HELOC. But, like the balance transfer advice above, unless you commit to not using the card again, you risk finding yourself trapped in a cycle of high-interest debt that is nearly impossible. to get out.

“A lot of people leave their credit cards open and then reload them, reload them again over a few years,” he says. “I see this time and time again. Then they have to pay off their credit cards at very high interest rates. So don’t use your HELOC unless you have to.

5. Investigate mortgage rates

If you’re shopping for a home, Wisconsin financial adviser Elliott Appel says you might want to compare the costs of an adjustable-rate mortgage, or ARM, and a fixed-rate mortgage. For the past few years, variable rate mortgages made no sense when people could lock in 30-year rates below 3%.

But now that rates are up, if you’re not planning on being in a house for more than a few years, a 7/1 or 10/1 ARM, where the rate is fixed for seven or 10 years before adjusting at a variable rate. If you are sure your purchase is not your forever home. “Many people don’t live in their homes for more than 10 years, so an ARM can lower your payment while locking in payment for a set amount of time,” Appel says.

6. Reduce the size of your house search

As mortgage rates rise, house prices will most likely fall. But as Unverzagt notes, getting caught up in the transition is painful.

“If you are looking for a house now, you may want to rent for a while or reduce what you had planned to buy to reduce the loan and interest impact,” she says, adding that she highlights Beware of shortening the term to a lower rate unless you are sure you can pay the monthly bill and your work is solidly secured.

“Better to have a longer term, higher interest and pay extra each month to pay off the mortgage sooner,” she says. “If something happens to decrease your income or increase your expenses, you will appreciate the buffer coin.”

7. Rethink your investments (but keep your emergency fund liquid)

Operating with the belief that interest rates will continue to rise for 12 to 24 months, Unverzagt says it is shifting its clients’ heavier cash holdings into short-term bonds. “You can get a year’s cash for almost 3%,” she notes. “If you don’t need that money for a year, that’s a great move right now.”

While it’s a good bang for the buck overall, it’s a poor place to park your emergency fund. “You could sell before maturity in a year, but you would lose money,” says Unverzagt.

Instead, keep your emergency/contingency fund in cash so it’s available in case of an emergency. But if you’re building up a big chunk of cash for a big purchase you’re planning for one to five years in the future, these lenses are great for keeping in a treasure trove while you wait.

About William Rowan

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