The Federal Reserve is raising interest rates throughout the year to combat high inflation. Here’s what that means for borrowers, savers, and investors.

The Federal Reserve has raised interest rates by 0.25% for the first time since 2018. As if that wasn’t enough, the organization expects to bombard us with six more rate hikes throughout the year.

But why?

As you’ve probably heard, inflation is currently at its highest point in 40 years, making everything from food to gas pricier.

Rising interest rates can help bring things back to normal by making borrowing more expensive, forcing people to cut back on spending.

Less spending equals less demand. And less demand translates into a more relaxed supply chain, which means lower prices for just about anything. 

So, even if it’s a bit confusing, higher interest rates are sort of a necessary evil to make our economy stable again. But what exactly does that mean for your student loan, auto loan, credit card debt, savings, and IRA? That’s what we’re here to answer.

If you have credit card debt…

Since most credit cards have a variable interest rate — meaning that it can fluctuate depending on market conditions — Robert Humann, chief revenue officer at Credible, says that if you’re carrying a balance, your debt, as well as your monthly bill, will probably become more expensive in the following months.

That’s because most lenders use the federal funds rate as their guide to set their own interest rates.

“Generally, when that rate rises, you’ll see other interest rates increase, including credit card interest rates,” Humann says.

However, before raising interest rates, Humann says that your credit card company must give you a 45-day notice to let you know about these changes, so you can prepare your pocket for what’s coming.

“If you’re struggling with high-interest credit card debt, paying it off with a fixed-rate personal loan could save you money in the long run,” Humann says.

He makes an excellent point.

The current APR for new credit card offers is 19.62%, according to LendingTree’s latest report, while personal loans from lenders like LightStream can provide you with a fixed APR as low as 2.99%, depending on your credit.

You can also pay off your credit card debt faster and avoid further interest charges by using a balance transfer credit card.

Although you’ll need excellent credit to receive the 0% introductory offer, you can get anywhere from 12 to 21 months to pay off your balance, interest-free.

Read more: Best balance transfer credit cards

If you have student loans…

If you have federal student loans, rejoice (at least a little). The Fed’s interest rate hike won’t actually have any impact on your loans or how much you’ll be paying each month, as these loans have a fixed interest rate. So, you can rest easy.

The problem, however, is if you have private student loans with a variable interest rate.

“It’s likely that people with current variable-rate private student loans will see some increase in their interest rates because of the rise in the federal funds rate,” Humann says.

“If you have a credit product with a variable interest rate, like a student loan or mortgage, you may be able to insulate yourself against further rate increases by refinancing into a fixed-rate product.”

But refinancing your variable rate student loans only makes sense if your credit score and income have substantially improved since you first got the loan. Otherwise, you won’t be able to secure the best terms or rates available, and it won’t make any sense to go through the whole refinancing ordeal.

Read more: Should you be worried about inflation if you have student loans?

If you have a mortgage or are planning to buy a house…

If you’re one of the lucky ones who already own their home with a fixed-rate mortgage, rising interest rates will have no negative impact on you. In fact, it’s the exact opposite. As everything becomes more expensive, your home’s value could increase, giving you more equity.

But if you have an adjustable-rate mortgage that is already adjusting, now may be the time to start thinking about refinancing your mortgage to lock in a fixed rate.

Still, just like with student loans, refinancing will only make sense if your credit and income have improved and you can secure a lower rate than the one you currently have. This latter part can be tricky, though — even with excellent credit — as mortgage rates are heating up rather quickly and are expected to keep climbing throughout the year.

If you’re on the hunt for a new home, Brendan McKay, president of Broker Advocacy at the Association of Independent Mortgage Experts, says the hike in interest rates “means that the home you will end up owning is going to be more expensive.”

McKay also points out that another drawback for prospective homeowners is that higher interest rates can also affect how much house they can afford.

“Most loan officers give pre-approvals for sales prices since that’s how people look for homes, but it’s all driven by a payment that you qualify for,” McKay says. “So, if you previously qualified for a $3,000 a month payment, your loan officer might have said you qualified for a $550K home, but now that $3,000 a month might only get you $500K.”

If you have an auto loan or are looking to buy a car…

Just like other fixed-rate lending products discussed on this list, if you already have an auto loan, you don’t need to worry about any changes in your APR or monthly payment.

Likewise, if you’re planning to buy a car, the rise in interest won’t substantially impact how much you’ll pay each month, as other factors influence the interest rate on an auto loan. These include your credit score, income, assets, debts, and whether you’re trying to finance a new or a used model.

So, if you’re on the market for a new ride, the best way to save money is to compare offers before committing to one.

Read more: Car-buying guide: how to buy a car and save big on your ride

What about savings, stocks, and other investments?

When it comes to your savings account, short-term certificates of deposit (CDs), and yields on cash investments, Amy Lynn Richardson, CFP with Schwab Intelligent Portfolios, says there’s good news as yields tend to rise in tandem with the federal funds rate.

Read more: Best high-yield savings accounts compared

Besides that, she points out that financial stocks (those belonging to banks and other financial institutions) also tend to “get a boost from higher interest rates.”

As far as other investments go, the best course of action is to keep in mind that investing is more about long-term success than short-term wins.

“No one knows exactly what will happen with interest rates, inflation, and numerous other factors that impact the markets,” Richardson says. “For most investors, the best approach to long-term success is broad diversification that aligns with their risk tolerance. This way, you are not putting all of your eggs in one basket.”

If you don’t know how to diversify your portfolio correctly, the best thing you can do is consult with a financial planner to develop an effective investment strategy. You can also invest using a Robo-advisor, which can do all the heavy lifting for you at a reasonable cost.

Read more: The best roo-advisors of 2022

The bottom line

There are both winners and losers when it comes to rising interest rates. The best thing you can do to protect your wallet is to cut down costs wherever possible, gravitate toward fixed-interest rate products if you need to borrow, and avoid variable rates.

Featured image: Andrii Yalanskyi/Shutterstock.com

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About the author

Heidi Rivera
Total Articles: 33
Heidi Rivera is a Puerto Rico-based personal finance reporter. Her areas of expertise include credit, student debt, and higher education. Heidi’s work has been featured on Money, Yahoo, MSN Money, and Money Talks News. When she isn’t writing, Heidi likes to watch horror movies, enjoy a slice (or four) of pizza while sipping on some wine, or chilling at home with her cats. You can reach her on Twitter @_HRivera or on LinkedIn.