The Federal Reserve is signaling that it will increase interest rates this year to deal with rising inflation.
Financial experts say those rate hikes will be small —only a quarter to maybe half a percentage point at a time — since current interest rates are near zero. However, the impact will be felt right away.
"Where you're going to see the impact quickest is going to be on things like credit card debt and home equity lines of credit. That variable-rate debt tends to reprice very quickly," said Greg McBride, the chief financial analyst at Bankrate. "You'll often see that higher rate within one to two statements cycles. Things like mortgage rates tend to move in advance because mortgage rates are based more on the outlook for the economy and inflation."
McBride says Americans should consider making a few moves before interest rates climb.
First off, take care of credit card debt.
"This is the time to act aggressively by paying down and paying off that debt before it becomes costlier as rates rise," McBride said. "If you have good credit, take advantage of those 0% and other low-rate balance transfer offers. With the ability to transfer the balance to one of those low-rate cards, you do two things. One, you give yourself this runway to get that debt paid off once and for all. But in the meantime, you're also insulating yourself from higher interest rates."
McBride also says those considering refinancing mortgages should act quickly before rates increase. Refinancing now can cut monthly payments by $100 to $200.
However, McBride says there's no need to rush a car purchase.
"When it comes to something like buying a car, rising interest rates really are the least of your concerns because it has such a minimal effect on the monthly payments," he said. "A quarter-point increase in rate, it's really only a difference of about $3 a month on a $25,000 loan, so nobody's going to have to downsize from the SUV to the compact because of rising interest rates."
McBride expects inflation to stay above what we've been used to for several years. For the better part of a decade before the pandemic, inflation remained below 2%, but he expects rates to stay above 2.5-3% moving forward.
