As of January 2022, the U.S. inflation rate had risen at its fastest pace in nearly 40 years, up 7.5 percent from the year before, according to the Bureau of Labor Statistics.

To combat inflation, the Federal Reserve is expected to increase the “federal funds rate” three times during 2022, and possibly more in 2023.

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The federal funds rate is the benchmark for a variety of financial products, including credit cards, home equity lines of credit, and auto loans. By increasing that rate, the Fed’s actions will make it more expensive for consumers and businesses to borrow money.

“[Consumer debt will become] more expensive, and that can really be a drag on people's finances,” said Kimberly Palmer, personal finance expert at NerdWallet. “It's a really good time to take a close look at the debt that you are carrying, and try to pay off any high interest debt that you have, if you can do that.”

Fixed-rate loans you already have will not be affected. Debt with an adjustable interest rate will get gradually more expensive. If you know you need to borrow, do it sooner rather than later. As rates increase, you should also shop around to get the best rates of return for your savings.

“It’s important to remember that this is just the start of interest rates going up,” said Greg McBride, chief financial analyst at Bankrate.com. “This is likely to continue for the next couple of years, so it's important to game plan for a series of rate hikes over the next couple of years.”

That means paying down debt—always a smart move—starting with loans with variable interest rates. And if you know you need to borrow, do it sooner rather than later.

As rates increase, you should also shop around to get the best rates of return for your savings.

Here’s a look at key areas of consumer borrowing and savings:

Credit Card Interest

Carrying a balance is going to get more expensive as interest rates rise. CreditCards.com predicts the average credit card interest rate, currently about 16.13 percent, will exceed 17 percent by the end of the year. Interest rates for those with poor credit, currently around 24 percent, will also go up.

“Card issuers have been building in some additional margin there, especially for those who are not quite as creditworthy, so rising interest rates are a big theme in the credit card world this year,” said Ted Rossman, senior industry analyst at CreditCards.com.

Auto Loans

Borrowing money to buy a car will be more expensive. Bankrate expects the best offers will remain below four percent on both new and used car loans throughout 2022. Bankrate expects the average five-year new car loan to be 4.40 percent and the average four-year used car loan to be 4.85 percent.

Mortgage Rates

They’re already going up. According to Freddie Mac, the average rate on a 30-year, fixed-rate mortgage is 3.89 percent—nearly a point higher than it was a year before.

If you’re buying a house, shop around for the lowest rate you can get, and then lock it in right away. If you’re planning to refinance, same thing: Shop around and lock in a rate ASAP to get the best deal.

“Mortgage rates have now risen enough that they may become more of a deterrent than a motivator for homebuyers,” said Daryl Fairweather, chief economist at Redfin.

If you’re buying a house, shop around for the lowest rate you can get and then lock it in right away. If you’re planning to refinance, same thing—shop around and lock in a rate ASAP to get the best deal.

Home Equity Loans and Home Equity Lines of Credit (HELOC)

These loan programs have become popular ways for people to tap the equity in their homes to pay for repairs or remodeling work. Bankrate predicts the average HELOC rate (which is variable) will climb to 5.05 percent, and the average rate for new home equity loans (a fixed rate) will hit 6.25 percent by the end of the year.

The Fed’s action on interest rates “directly influences” rates on home equity loans and home equity lines of credit, Bankrate’s McBride told Checkbook. “If the Fed raises rates a quarter of a point, your HELOC rate is going to go up a quarter point within one or two statement cycles,” McBride said.

And if lenders phase out promotional offers, as McBride expects they will, rates may go up faster than the Fed’s increases.

Bonds

The bond market reacts quickly to interest changes, so expect prices to decline as soon as interest rates get hiked.

Stock Market

Wall Street doesn’t like uncertainty, so expect higher volatility. No one can predict what the market will do; stick to your long-term investment strategy.

One Bright Note

Interest rates on savings accounts and certificates of deposit could also increase slightly because of the Fed’s actions. But don’t expect any significant improvement. Financial institutions have enormous cash reserves right now and don’t need to boost rates to encourage deposits. Online banks should pay the highest rates on savings accounts.

Contributing to a savings account on a regular basis, even with a paltry return, will help you build a rainy-day fund to draw on in case of a financial emergency.

Avoid Making Hasty Decisions

Interest rates are just one factor if you’re debating a major purchase such as a home or car. Don’t let a slight rise in rates rush you into making an unwise decision. Yes, mortgages and auto loans will cost slightly more, but the price of that purchase and how it fits into your overall financial situation should be what influences your decision.

 




Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for NW Newsradio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.