The Fed has been a bit more active as of late as it relates to monetary policy and adjusting interest rates. The Federal Open Market Committee, or FOMC, meets every six weeks or so to discuss the current economic policy and the cost of funds. So far this year we’ve seen one interest rate increase of 0.25% in addition to the move made at the end of last year. The Fed has also commented we can expect to see at least two more rate increases in 2017. Here are a few tips handling your finances in light of rate moves.
1. Don’t Panic. When the Fed raises rates it essentially raises the rate banks can charge one another for short term, overnight loans. Those rate increases cause the banks cost of funds to rise which will ultimately be passed on to credit cards, auto loans and other accounts. Yet the amounts are incremental and you’ll barely see a difference.
2. Pay Them Down. To avoid slightly higher payments in the future, start paying down your debt which will more than offset any future rate moves. Don’t just make the minimum payment, make a little extra.
3. Highest to Lowest. When paying down debt, start with the account carrying the highest interest rate, not the lowest. Credit cards typically carry higher rates than other credit accounts.
4. Don’t Take On More. Don’t open up any new credit accounts if your budget doesn’t appear to handle it. If your budget is tight now, slightly higher rates later will only make it tighter.
5. Refinance? If you’ve got a variable rate mortgage now or a hybrid loan, it’s probably in your “best interest” to refinance now rather than later. Interest rates anticipate Fed action and doesn’t react to it. Mortgage lenders are rarely surprised at Fed moves.
In short, it’s probably best to step back and look at what the Fed actually does when it raises or lowers the Federal Funds rate. It makes for a lot of good press when the FOMC meets but rarely does any increase have a significant effect on credit markets. But overall, keep these tips in mind so when the Fed does make a move, you’re already prepared.
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