- The Federal Reserve announced a half-percentage-point rate increase on Wednesday, May 4, 2022.
- The benchmark rate is up from near 0% during the pandemic to between 0.75% and 1.00%.
- If you owe money, this is bad news since you can expect borrowing costs to rise.
Rising rates could affect your current debt costs, and your ability to refinance.
On Wednesday, May 4, 2022, the Federal Reserve announced the second increase in its benchmark interest rate since 2018.
The Fed first raised rates in mid-March 2022, in an effort to cope with surging inflation, but rates went up just 25 basis points. Now, a much bigger rate increase was announced -- the largest since 2000. Rates are up 50 basis points, resulting in a half-percentage increase and bringing the benchmark rate to between 0.75% and 1.00%.
Since rates were near 0% during the pandemic, this is a huge rate increase. And if you currently have any debt, this could be very bad news for a few key reasons.
Credit card interest rates will rise
If you carry a balance on your credit cards, you must pay interest on the amount you owe. Interest rates are typically variable on credit cards. This means you aren't guaranteed to be able to continue paying the same rate over time. Instead, your rate is tied to a financial index that's affected by the federal funds rate.
A big increase in this rate, like the one that occurred today, results in your card issuer raising the rate it charges you. You'll see a higher rate take effect within a billing cycle or two, causing your borrowing costs to go up.
If you can repay your card balance in full, you can avoid getting hit with extra interest charges once your rates go up. If this isn't within reach financially, a balance transfer could help if you're eligible.
Balance transfer cards charge you a small fee -- typically around 3% -- to move over an existing balance from one or more credit cards. The transferred balance is subject to a 0% interest rate for a set period of time which could be as long as 12 to 15 months. As a result, paying one affordable upfront fee could allow you to reduce your interest rate to 0% for a long time so you won't have to worry about your rate going up in the near-term.
Adjustable-rate mortgages could become more expensive
If you have a fixed-rate mortgage, the Fed’s rate increase won't affect you. But if you have an adjustable-rate loan, that's a different story.
See, ARMs allow you to lock in your starting rate for a period of time -- typically three, five, or seven years depending whether you have a 3/1 ARM, 5/1 ARM, or 7/1 ARM. After that initial period has expired, your rate moves along with a financial index. And as a result, rising interest rates are likely to lead to your mortgage costs going up.
When your rate goes up, your monthly payment can also increase in order to repay your loan on time. And your total borrowing costs over the life of a loan will be higher since you're sending more money to your lender.
Unfortunately, there's not much you can do if you have an ARM. Your rate is almost definitely going to go up if it's already in the phase where it is adjusting or if it will be soon. You may want to look into refinancing into a fixed-rate mortgage so you can gain more certainty going forward about how much you'll pay.
The big downside is that refinance rates are already up considerably compared with last year and are likely to rise further with the Fed’s announcement. Still, it may be worth refinancing ASAP to lock in at today's current rates as the central bank has signaled more rate increases are coming.
Refinancing debt may no longer be worth it
As mentioned above, refinancing a mortgage loan has already become much more expensive compared with last year, and refinance rates will likely go up further thanks to the Federal Reserve's efforts to fight inflation.
It's not just mortgage refinances that could be affected, either. If you were hoping to secure a personal loan to refinance existing debt, rates are likely going to be higher on that as well. You'll need to shop around carefully and compare what you're currently paying to what rate you're being offered to decide if refinancing still makes sense for you.
As you can see, this rate increase isn't good news if you owe money. But if you're aware of the fact that your rates may rise, you can be proactive in coming up with a plan to try to pay down debt or to minimize the damage in other ways such as by transferring your credit card balance. It's well worth the effort, especially as interest rates are expected to keep going up throughout this year.
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