Rock-bottom interest rates for years have punished savers and rewarded borrowers. Now the tide is turning. Federal Reserve policy-makers in December raised a key rate and signaled another three increases for this year.
"The Fed can change its mind," warns Christine Benz with Morningstar, an investment research and management firm. But if it doesn't, here's how to adapt to rising rates.
Rates on almost all cards are variable, so expect your rate to go up within 60 days after the Fed raises its rate.
Tip: If you carry a balance, snap up one of those offers to transfer that debt to a new credit card interest-free for up to 21 months, says Greg McBride, chief analyst with the financial site Bankrate.com. Then pay off the debt.
Inflation and the economy have more impact on fixed-rate mortgages — the most common type of mortgage — than Fed action, says Keith Gumbinger, vice president with HSH.com, a mortgage information site. Rates may rise if the economy continues to improve and inflation heats up, he says.
Tip: If buying a house, consider an adjustable rate mortgage (ARM) with a fixed rate for five years, Gumbinger says. ARMs have been out of favor, but now are one percentage point less than a 30-year fixed loan. Be aware, the rate can rise in five years.
Home equity lines of credit
Within three months after the Fed raises its rate, people will see a bump in the rate — and in their payments — on an outstanding line of credit, Gumbinger says.
Tip: Borrowers usually pay only monthly interest on the sum borrowed for the first 10 years, and then must start repaying principal. If bigger repayments will be a problem, contact the lender to explore your options, Gumbinger says.
Competition among lenders is so fierce that average rates on car loans will remain around 3 percent, McBride says.
Tip: These low rates are for borrowers with good credit scores. If that's not you, improve your score before buying. Boost a weak score from credit card debt by paying down the balance, says credit expert John Ulzheimer.
Savings and CDs
Rates on savings accounts and certificates of deposit will likely rise toward year's end, if the Fed continues to hike rates, McBride says.
Tip: Many people buy CDs with different maturities — a strategy called laddering — so all their savings aren't locked in at the same rate for years. If you're setting up a ladder now, stick with CDs maturing in a year or less so you can reinvest as rates rise, McBride says.
When rates rise, the value of old bonds falls because they offer a lower yield than new bonds. Then, if older bonds are sold before maturity, they must be sold at a discount.
Tip: Bonds and bond funds provide stability to a portfolio — in contrast to stocks — so don't avoid them, advises Tim Maurer with BAM Alliance, a network of investment advisers. But stick with stabler, shorter-term bonds that are less sensitive to rate changes, he says.