By Bria Overs | Word in Black
he Federal Reserve raised interest rates by 0.25 percentage points for a tenth time on Wednesday in a continued attempt to get a handle on inflation.
With rates at a 16-year high, this decision ripples throughout the economy, with consumers directly feeling the change. However, how it affects consumers depends on their financial goals.
Basically, it’s a terrible time to borrow compared to previous years — but a great time to save.
“I would advise people to pay down any debt that is at a higher interest rate than your earning interest rate,” says Eszylfie Taylor, president and founder of Taylor Insurance and Financial Services.
Fed Rate on Homes, Mortgages, and the Housing Market
Homeowners with a fixed-rate mortgage won’t feel much of the pain from these increases. These types of mortgages have an interest rate that doesn’t fluctuate or change over time.
Bankrate says the Federal Reserve does not set mortgage rates, “but its policies influence the financial markets and investors that dictate how these rates move.”
So, those trying to enter the homebuying market are facing difficulties, Taylor says.
And that’s what the government is aiming for. Each hike in interest rates makes it more expensive for consumers to borrow money through loans and credit cards. The goal is to slow the economy and get inflation under control.
Adjustable-rate mortgages, on the other hand, have an initial fixed rate but change monthly with the market after the initial term. This makes them susceptible to changes from rate hikes.
“If you’re trying to buy your first house or maybe refinance a house or buy a car, and rates are super high, it’s challenging,” Taylor says.
The effects of these rate increases are felt in the car-buying market as well. Like mortgage rates, the Federal Reserve doesn’t directly set the rate. However, they do set the benchmark rate that “affects the number auto lenders base their rates on,” according to Bankrate.
In the first three months of the year, average interest rates on car loans for new vehicles were 7% and even higher for used vehicles at 11.4%.
This time last year, Edmunds found rates were 5.1% for new cars and 8.2% for used cars.
Depending on credit history and loan terms, these loans can have high payments and expensive interest rates.
“It doesn’t serve me to invest, even if treasuries or fixed rate vehicles are at 4% if I’m still borrowing at 7% or 8%.”
Credit Cards and Credit Scores
Credit cards are another form of borrowing the Federal Reserve is trying to slow down.
Average interest rates on credit cards are currently higher than 20%, compared to less than 17% in March 2022.
Credit cards become an issue if the Annual Percentage Rate or interest rate is applied to the balance being carried. This makes it more expensive and difficult to pay down debt for some.
Taylor’s advice is the same for debt in this category — pay it down and avoid paying interest.
Rate hikes do not directly affect credit scores, but missed and late payments on a credit card, car loan, mortgage, or any other debt can create trouble that is reflected in a credit score.
There’s a delayed effect, Taylor says. Increasing rates today won’t result in a reduced credit score next week, “but it could in six months, in a year, or two years.”
Investments and Savings
Savings and other investments are great ways to grow money despite the rate increases’ negative effects on debt and loans.
Many banks and credit unions offer competitive Annual Percentage Yield rates on high-yield savings accounts, certificates of deposit, and money market accounts.
Investing money in these can create what some financial professionals call passive income.
Taylor’s been in the business for over 20 years and says he hasn’t seen rates like these in over a decade. He would jokingly call certificates of deposit, or CDs, “certificates of depreciation” because, up until now, they didn’t have great returns on investment.
Now, he’s thinking about them differently.
Taylor recommends folks use the “debt elimination” mindset versus the “asset accumulation” mindset, especially when borrowing rates are high.
The Inland Valley News coverage of local news in Los Angeles and San Bernardino counties is supported by the Ethnic Media Sustainability Initiative, a program created by California Black Media and Ethnic Media Services to support minority-owned-and-operated community newspapers across California.