The Federal Reserve raised the benchmark interest rate seven times in 2022. In December 2022, it raised the target federal funds rate range to 4.25% – 4.50%. This is the highest the benchmark has been in years. The last time it was this high was in December 2007.
As an average American, you might not care too much that these interest hikes can combat record-breaking inflation rates and restore economic balance in the upcoming year. Your main concern is how these rates can impact your personal finances in the near future. Read ahead to find out how the Federal Reserve’s latest decisions can impact you.
Credit Cards
The prime rate on your credit card is directly connected to the benchmark interest rate set by the Federal Reserve. Every time that benchmark rate is raised, the prime rate on your card can rise up to follow it. The average rate for credit cards is at a high of 19% right now.
So, you might notice that your credit card bills are steadily climbing. If you’re not careful with your credit management, those bills could get out of control.
This won’t happen if you have a fixed-rate credit card. A fixed rate means that your interest rate won’t fluctuate with the prime rate. It’s unlikely that you have this option available since most credit cards operate with variable rates.
What can you do to manage your higher credit card bills?
- Only use your credit card to pay for essential expenses. If you can use money from your checking or savings account to make a payment, do that instead.
- Pay your credit card bills on time. Do not rack up late fees.
- Pay more than the minimum on your bills.
- Adjust your monthly budget so that you can pay down your credit balance faster.
- Call your credit card issuer to see whether you can negotiate a lower interest rate (even for a temporary period). Try this with your oldest credit card first.
Savings Accounts
While the higher benchmark interest rate makes managing credit a little more challenging, it makes saving much easier. This could be a good moment to open up an interest-bearing savings account and put some money away. You’ll find better interest rates for savings accounts offered by online-only banks since they have lower overhead costs than their brick-and-mortar counterparts.
What should you use a savings account for? If you don’t already have one, you should open up a savings account to make an emergency fund. Without an emergency fund, you might not be able to manage urgent, unanticipated expenses whenever they arise. You’ll have to turn to other payment methods to get through your emergency.
Without an emergency fund, you could use your credit card to cover an urgent expense. This could pose a problem if you’re trying to keep your credit balance on the low end, but you might be willing to make this sacrifice in an emergency. You could also look into online loans. You can discover options near you when you need help paying for an urgent expense. Getting approved for the loan could give you access to necessary funds in a short amount of time.
Ideally, you should have an emergency fund full of savings on hand. It’s the best solution for managing an urgent expense.
These interest rate hikes are impacting the financial world. So, it’s time to adjust your finances!
