Personal Finance: Time to prepare for rate hikes
A few weeks ago, economists and money managers on Wall Street were predicting that the Federal Reserve Board would soon stop raising short-term interest rates. In fact, conventional wisdom said the Fed would end its rate hikes once the so-called federal funds rate–the interest that banks charge one another on overnight loans–hit 3.75 percent. With the fed funds rate currently at 3.5 percent, that implied just one more move.
But all of a sudden, conventional wisdom has changed. Now, two thirds of fund managers think the Fed won't stop increasing short-term rates until the federal funds rate climbs to 4 percent or higher, according to a new survey of professional investors released this week by Merrill Lynch. And a growing percentage thinks the Fed won't stop until it hits 4.5 percent or higher.
This week's worse-than-expected news concerning inflation–wholesale prices rose twice as fast last month as economists were forecasting–is likely to give the Fed even more reason to continue raising rates for the rest of the year, if not beyond.
The prospect of higher rates has implications for all consumers. Consider this: Over the past year, the average interest rate on an adjustable-rate credit card has shot up from below 11.9 percent to 14.2 percent, according to the credit card tracker Cardweb.com. Making matters worse, nearly three quarters of all card accounts now have variable rates as opposed to fixed rates, according to Cardweb.
So what can households do to prepare for more rate hikes?
- Make it a priority to pay off all variable-rate cards now. Remember, $1,000 in card debt today could end up being far more expensive to finance come the end of the year.
- Zero out the balances on your variable-rate cards, but don't necessarily cancel those accounts. Approximately 15 percent of your credit score is based on the length of your credit history. So if you close out a credit card account that you've had for a decade or longer, you may end up shortening the average length of your credit relationships. And that could hurt your credit score, which is the numeric value that lenders rely on to gauge your credit worthiness.
- Concentrate on paying down other variable-rate loan products, including home-equity lines of credit, floating-rate car loans and even adjustable-rate mortgages. The faster you pay them off, the lower your total interest costs will be.
Paul Lim edits the Money Watch page for U.S.News & World Report.
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