Anticipated moves by the Federal Reserve this year may mean you might need to rethink your financial priorities in 2022 — especially if you owe high-interest debt.
The central bank last month signaled it would likely raise its key benchmark rate — the fed funds rate — this year to help combat rising inflation. Minutes from the Fed's last meeting released Wednesday further underscored this position.
For savers, these moves may mean bigger returns on cash they have stashed in the bank. But any hikes could increase the interest rate you pay on your credit cards, student loans, and home equity lines of credit.
“Knowing the Fed rate hikes are on the horizon makes it all that more important for folks to take action on their debt now,” Matt Schulz, chief lending officer at LendingTree, told Yahoo Money. “It’s only going to get more expensive going forward. It’s important for people to prepare for that.”
Here are the steps to consider now.
Deal with credit card debt
Most credit cards come with a variable interest rate that is tied to the movement of the fed funds rate. That means if the Federal Reserve increases its rate, so goes the rate on your credit cards — often in lockstep and soon after the central bank hikes.
“Often you see that higher rate within 30 to 45 days of the Fed’s move,” Greg McBride, chief financial analyst at Bankrate, told Yahoo Money.
Given that credit card rates range from 15% to 23%, a three-quarters of a percentage point hike is a meaningful increase, especially if you have high balances. The good news is that you still have time before the Fed hikes rates to help yourself.
Look around for a 0% balance transfer credit card that allows you to move your outstanding balances onto one card and pay no interest for a set period — as much as 15, 18, or even 21 months. Spend that time aggressively paying down your debt.
“Not only does that insulate you from the expected rise in rates, it gives you a window to get that credit card paid off once and for all,” McBride said.
Other options include requesting a lower interest rate on your current credit cards — a move that is more successful than many realize, Schulz said — or taking out a low-interest personal loan with a fixed rate to pay off your card balances.
Refinance private student loans to a fixed rate
Rates on some private student loans are variable and fluctuate with the fed funds rate, according to Andrew Pentis, student loan expert for StudentLoanHero.com, so those borrowers would see an increase after any Fed hike.
One option is to refinance your student loans to a fixed rate, Pentis said.
“These rates — along with federal loan rates — have been at historic lows in preceding months,” he said in an email.
Lock in a lower rate on HELOCs
Rates on home equity lines of credit, also known as HELOCs, are typically variable and tied to the movement of the fed funds rate. If you owe on your HELOC, ask your lender if you can fix the interest rate on the outstanding balance. Any future borrowings would be subjected to the higher prevailing rate.
"If the lender offers this, wait until we get closer to the Fed hike before exercising the option,” McBride said. “You may have an emergency and need to borrow more, so you don’t want to be locked out of a lower rate.”
Move savings to a higher-yielding account
Some banks have started raising rates on deposit accounts in anticipation of the Fed's rate increases this year, according to Ken Tumin, banking expert for DepositAccounts.com, with the biggest opportunities coming from online long-term certificates of deposit, or CDs.
For instance, online CD rates had the largest gains since 2018 in November with the average 5-year online CD rate increasing to 0.86% from 0.71% and the average 1-year online CD rate edging up 0.51% from 0.48%.
Changes to rates on savings accounts will come slower, if at all. There have been no meaningful gains at the big banks, which in the last decade have provided paltry yields. Online banks may offer better options later in 2022.
“Based on history, large gains in online savings account rates are unlikely until the Fed completes a few rate hikes,” Tumin said.
Janna is the personal finance editor for Yahoo Finance. Follow her on Twitter @JannaHerron.