No one needed a crystal ball to see that historically low interest rates weren't going to last forever. But consumers might be surprised at the timing and frequency at which rates will increase in 2022. The Federal Reserve plans to raise rates sooner and faster than expected. According to Reuters, rates are predicted to rise as early as March and increase at least three times this year.
Here are four things you can do before the first uptick in rates affects your finances.
1. Pay off debt quickly by opening the right credit lines.
Adopt a debt repayment plan that helps you repay debt sooner. You can begin with paying more than the minimum required payment, or take a more aggressive approach like using funds from a second job to wipe out balances fast. If neither option works for your situation, consider opening a new credit account that offers 0% introductory rates on balance transfers.
As interest rates rise, less of your regular payment will go toward the principal balance. But, if you move your current debt balances to a new line of credit and avoid adding to your debt, your regular payment will have a greater impact on your ability to eliminate debt fast.
2. Refinance to a fixed-rate credit line or loan.
When you refinance variable-interest rate debt to a fixed rate, you can lock in savings before interest rates increase. If you have a variable-rate loan or adjustable-rate mortgage (ARM), even a slight uptick in rates could make what was once affordable unaffordable. Refinance variable-rate loans now to help ensure that rate increases don't squeeze your budget.
3. Transfer emergency funds to a high-yield savings account.
Savings accounts and other lower-risk banking products typically pay smaller dividends when interest rates hover in the low single digits. But when interest rates increase, so does your ability to earn more with these types of accounts. Transfer the balance from a regular savings account to a high-yield savings account to maximize earnings. While earnings are likely to increase if you keep the money in an existing account, the switch could give your balance an extra boost.
4. Use Certificate of Deposit (CD) ladders.
CDs are a low-risk way for savers to earn more on their bank deposits. CDs guarantee a specific rate of return if you keep your deposit in the account for the minimum required term. When the term ends, the CD has "matured" and you receive your original deposit plus the interest rate assigned to the CD. Consider purchasing several CDs with various maturity dates.
For example, instead of purchasing three CDs that expire at the same time, purchase three CDs that are set to expire at regular intervals, such as 6, 9, and 12 months. Or you could select a shorter CD term and when it matures, roll the proceeds into a higher-yielding, longer-term CD. Generally, the longer you keep funds in a CD, the higher your potential earnings since you're likely to capture the increases in interest rates.
Even consider a flex CD that allows you to bump the rate, make a deposit or withdrawal during the term of the CD for the ability to make those changes at your preference.
A change in interest rates won't automatically spell disaster for your finances, but you can minimize the risks. Make money moves that take advantage of lower borrowing costs before rates increase and higher savings rates after they begin to climb.