Here’s where the Fed will hit you the hardest and what you can do about it

Rate hikes will continue 'until the job is done,' Powell says: Here's where the Fed will hit you hardest, and what you can do about it

Rate hikes will continue ‘until the job is done,’ Powell says: Here’s where the Fed will hit you hardest, and what you can do about it

More pain is likely yet to come, Federal Reserve Chairman Jerome Powell said from the Fed’s Jackson Hole conference in Wyoming.

Powell spoke briefly Friday morning, but his message was clear: The Fed “is going to keep doing it until the job is done.” That job is to bring inflation under control.

And although July’s 8.5% inflation was lower than in June, a month of movement in the right direction is not enough to stop the pressure, Powell said. He added that it is not time to press “pause” or “stop” on inflation measures.

In July, the Fed raised the federal funds rate by 75 basis points to 2.25-2.5%, the second increase in as many meetings.

If Powell’s brief speech on Friday is anything to go by, an increase is likely to come in September, which could push the rate above 3%.

This will increase the cost of debt. But there are ways to keep your costs down even when they seem out of control.

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Home loans

Before last month’s rate hike, the average 30-year fixed-rate mortgage was 5.5%, nearly double what it was last year.

If you already own a home and have a fixed rate mortgage, then the increase won’t affect you immediately. But if you have a variable rate, you may see a difference. And if you’re looking to buy now, you’ve already lost a significant amount of purchasing power.

“For every percentage point the interest rate goes up, there are about half a million fewer people who qualify for a home,” says John Mallett, president of Main Street Mortgage, a mortgage broker in Ventura County, California.

But all hope is not lost.

“It’s starting to become a balanced market where supply tends to meet demand,” says Mallet.

This gives the prospective buyer more options.

“It’s possible that people may, when they make an offer on a home, be able to ask the seller to pay for $10,000 of the closing costs that will go toward the lower priced purchase. So you can make price buyouts. And it will make it easier for them to qualify for funding.”

Mallett suggests considering a temporary rate buyout, which allows the buyer to pay a lower rate for the first two years before it increases to the regular rate.

Both a buyer and a seller can pay for the buydown, and it can be a one-time payment using mortgage points. One mortgage point is equal to 1% of your total loan amount. So, for example, on a $100,000 loan, a point would be $1,000. Salespeople sometimes use it to motivate a sale.

If you already own a home and have a home equity line of credit, those rates will be affected by another Fed rate hike.

Credit cards

Americans have a lot of credit card debt – more than $840 billion worth. And when the federal funds rate goes up, so does the interest on that debt.

The median credit card interest rate in July before the latest rate hike was 20.8%.

It’s becoming increasingly important to pay off your credit card balance, says Jim Droske, president of Illinois Credit Services, a credit counseling service based out of Chicago.

“That’s not always realistic for people,” he says. “But if they can, they should pay them off so there’s no balance left to charge interest on.”

Another option is to call your credit card company and ask for a rate reduction, Droske says.

“Sometimes these companies just don’t report it. But if you ask, sometimes they’ll give you a better schedule.”

Car loans

Your car loans won’t escape the next interest rate hike either. In the first quarter of 2022, the national average interest rate for a 60-month auto loan was 4.07%, according to Experian, and will continue to rise as new rate hikes are announced.

To get the best rate on a car loan, you need to shop around and check with multiple lenders, but Droske says a decent credit score is key.

“Your credit is extremely important when going for a car loan,” he says. “Just because you get approved for a loan doesn’t mean [it has] good terms, and it can be anywhere – I mean, you could pay 19%, you could pay 9%.”

What you end up paying is largely based on your credit score, he says. So while your prime rate will affect what you pay, how you treat your credit will have a huge impact on your rate.

Better credit is going to go a long way here

The good news is that there is a lot you can do to clean up your credit score.

“In a …financial world based on interest rates, credit is king,” says Droske.

He says you should check your credit score for any discrepancies or errors or medical debt that hasn’t yet been discharged. You should also pay off your credit balances as much as you can and see if you can get a higher credit limit.

But the best advice right now might be the simplest.

“If you don’t need it, don’t buy it right away,” says Droske. “People tend to go out and buy cars sometimes when they don’t need it and all those things are very expensive right now.”

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This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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