Interest Rates Likely to Rise in 2022 - Here are the Top Ways to Prepare

• Author: Michael Bordonada
• Posted: 2024-09-12

According to recent reports, the U.S. Federal Reserve will likely raise the country's benchmark interest rate by a full percentage point in 2022. The U.S. Federal Reserve is the central banking system that establishes the federal funds rate. Federal funds determine two types of interest rates: the overnight interest rate and the prime interest rate. The overnight interest rate is the standard marker at which banks borrow from each other. This rate affects commercial industries. The prime interest rate is a marker used to determine consumer interest on credit cards, mortgages, and loans.

When the federal funds rate rises, the overnight interest rate and prime interest rate typically follow. For consumers with debt, this raises consumers on how higher interest rates can impact finances. The good news is that there are steps you can take to improve your finances while the benchmark interest rate remains at a desirable 0.08%. A look at the top four ways to prepare for a hike in interest rates can help you make the smartest moves with your money.

Consider Refinancing Your Home Loans

While the average mortgage interest rate remained around 3% in 2021, the Mortgage Bankers Association predicts that the rate will jump to 4% in 2022. This means that monthly mortgage payments can also go up. For example, increasing the interest rate from 3% to 4% on a 30-year mortgage for $300,000 home translates into paying an additional $147 every month. Concerned homeowners should inquire about locking in a lower rate before interest climbs any higher.

Individuals with adjustable or variable rates may have already noticed fluctuations in their monthly payments. Do your research about refinancing to avoid unstable rates. Similarly, the benchmark rate can directly impacts a home equity line of credit (HELOC). For homeowners who have one, now is the time to inquire about converting a variable loan into a fixed-rate policy.

Consider Refinancing Your Private Student Loans

Although private student loans did not qualify for the Biden administration's deferment on federal student-loan payments and interests, individuals with private loans have the right to refinance using the existing federal rate. In other words, now is the time to shop refinancing plans while implementing the 0.08% federal funds rate as your benchmark. Waiting until after the federal funds rate rises can mean that your refinancing plan can increase in price.

Create a Plan to Pay Down Credit Card Debt

According to market analytics, the average interest rate for credit cards currently hovers around 16%. However, a federal rate increase means that average interest rates could rise to 17% by the end of the year. This extra interest can translate into higher minimum payments as well as longer payoff periods. If you have concerns about rising rates, the start of the year is a great time to look at debt consolidation options (such as balance transfers). You can also consider using any payment pauses (such as the federal student loan pause) to do other financial housekeeping like shaving down your credit card balance.

Create a Strategy to Improve Your Credit Score

Individuals interested in a personal loan often scramble to apply before federal interest rates go up. But because lenders use consumer credit scores to determine who gets the best offers, the best way to offset any general rate increase is to improve your credit score. Even if you are not interested in a personal loan, credit cards provide a perfect example of how this process works. Federal law allows credit card providers to raise a customer's interest rate at any time (provided the bank supplies the customer a 45-day notice). Now, consider the fact that the average American household has an outstanding credit-card balance of around $6,000. Individuals with credit scores of 660 to 719 often receive card rates that enable paying less than $2,000 in interest per year. In contrast, individuals with subprime credit scores of 580 to 619 pay an average of $700 more in interest every year. To keep your credit score high, try to keep your debt-to-credit ratio below 30% while making on-time payments of your balance each month.

Although news of a benchmark rate increase can sound intimidating, individuals can use the change as an opportunity to overhaul their own finances. If you have any form of consumer debt, always monitor individual interest charges to manage this often-forgotten step in lowering your monthly expenses.