Yahoo Finance ‘If you don't need it, don't buy it right now’: Where the first Fed interest rate hike of 2023 will hit you hardest and what you can do about it
If you’ve been on a spending spree lately, the Federal Reserve would kindly like you to stop — at least until inflation has cooled down.
With a goal of getting inflation back down to a healthy 2%, the Fed just announced its eighth consecutive rate hike. But inflation is still hot, which is why most policy-makers expect the rate to hit or surpass 5% this year, a move that could trigger a recession.
On Wednesday the Fed raised the federal funds rate by 0.25 percentage points, which leads the benchmark interest rate to sit in the range of 4.50 to 4.75%.
This rate may seem manageable, but that's the highest it has been in 15 years. Plus, banks and lenders add their own interest on top of that number, which is where credit can start to get expensive.
“When the price of peanut butter goes up, it's bad for the sales of jelly – so If the price of credit goes up, it's bad for things where people typically rely on credit to get it,” says Mark Witte, professor of instruction in economics at Northwestern University. “Housing, cars, things of that nature.”
But even when costs seem out of control, there are always ways to lower them.
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Mortgages
The average 30-year fixed rate mortgage sits at 6.33%, more double what it was this time last year.
If you have a fixed rate mortgage then the raise won’t immediately impact you. But if you are lucky enough to have a variable rate, you may see a difference. Looking to buy now? You’ve likely already lost some buying power, due to the raised rates.
“For every percent that the rate goes up, there's about a half a million less people qualifying for a home,” says John Mallett, president of Main Street Mortgage, a mortgage broker in Ventura County, California.
But don’t give up yet.
“It is starting to become an equalized market where supply is getting towards meeting demand,” says Mallet.
Prospective buyers could have some added leverage when buying.
“It's possible that people can, when they make the offer on a home, they can ask the seller to pay for $10,000 of closing costs that will go towards buying down the rate. So you can do rate buydowns. And it'll make it easier for them to actually qualify for financing.”
Mallett suggests considering a temporary rate buydown, which allows the buyer to pay a lower interest rate for the first couple of years before it rises to the regular rate.
Both a buyer and a seller can pay for the buydown and it can be a lump sum payment using mortgage points. One mortgage point equals 1% of your total loan amount. So for example, on a $100,000 loan, one point would be $1,000. Sellers will sometimes use it to incentivize a sale.
If you already own a home and have a home equity line of credit, those rates will be affected by the Fed’s increase.
Credit cards
Americans have a lot of credit card debt – over $925 billion worth as of the third quarter of 2022. And when the federal funds rate goes up, so does the interest on that debt.
The median interest rate on credit cards in December before the Fed’s rate rise was 22.91%.
It’s becoming more and more important to pay down your credit card balance, says Jim Droske, president of Illinois Credit Services, a credit counseling service outside Chicago.
“That's not always realistic for people,” he says. “But if they can, they should pay them down so there is no balance to have an interest rate charged on.”
Another option is calling your credit card company and asking for a rate reduction, says Droske.
“Sometimes those companies just won't bring it up. But if you ask, sometimes they'll give you a better program.”
Car loans
If you thought you’d find some reprieve here, you thought wrong. In the third quarter of 2022, the national average rate for a 60-month car loan was 5.16%, according to Experian, and it will continue going up with the Fed’s latest announcement.
Checking with multiple financiers and shopping around might net you the best rate on a car loan, but Droske says a decent credit score is the key.
“Your credit is extremely important when you go for a car loan,” he says. “Just because you get approved for a loan doesn't mean [it has] good terms, and they can be all over the board – I mean, you could pay 19%, you could pay 9%.”
What you do end up paying is largely based on your credit score, he says. So while the benchmark interest rate will affect what you pay, your credit history will have the biggest influence on the rate you get.
Better credit will help you in the long run
If your credit is less than perfect, there are actions you can take to improve it.
“In a …financial world based on interest rates, credit is king,” Droske says.
He says a good place to start is by checking your credit score for any discrepancies, errors or medical debt that has yet to be removed. You should also pay down your credit balances as much as you can and see if you can get a higher credit limit. That increases your debt to available credit ratio.
But the best advice right now, might be the simplest.
“If you don't need it, don't buy it right now,” says Droske. “People tend to go out and buy cars sometimes when they don't need to and all those things are very expensive right now.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
