For most Americans, the rising cost of living is taking a heavy toll on their wallets.
“Wage growth has failed to match the dizzying pace of rising prices, which the Federal Reserve has effectively identified as ‘monetary policy enemy #1,'” said Mark Hamrick, senior economic analyst at Bankrate.com.
After the Fed hiked rates for the first time in more than three years, Chair Jerome Powell pledged a tough crackdown on inflation, which he says is threatening an otherwise strong economic recovery.
More from your money Your future:
Here’s a look at more stories on how to manage, grow, and protect your money for years to come.
The central bank is now expected to hike rates by half a percentage point at both its May and June meetings.
Any movement will be accompanied by an increase in interest rates, immediately raising the cost of financing many forms of consumer borrowing.
What you should know about rising interest rates
Consumers will be among the first to see their short-term borrowing rates, particularly for credit cards, soar.
Since most credit cards have a variable interest rate, there’s a direct link to the Fed’s benchmark, so your APR goes up with every move by the Fed, usually within a billing cycle or two.
Adjustable rate mortgages and home equity lines of credit are also linked to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts instantly.
With 15-year and 30-year mortgage rates fixed and tied to Treasury yields and the economy, homeowners won’t be immediately hit by a rate hike. However, anyone buying a new home will pay more on their next home loan (the same goes for car buyers and student loan borrowers).
“Mortgage rates have been rising steadily for the past month, driven by inflation and the Federal Reserve’s efforts to control inflation,” he said Holden Lewis, home and mortgage expert at NerdWallet.
“Just a few months ago, most forecasters were predicting that rates would rise throughout the year but would not reach 5%,” he added. “Well, we’re only approaching 5% a quarter of the year.
“Interest rates will continue to rise until investors see inflation coming down.”
Here are three ways to stay ahead of rising interest rates.
1. Pay off debt
When interest rates are rising, the best thing to do is pay off debt before larger interest payments drag you down.
When you look at the debt you owe, pay off the debt with the higher interest rates first, said Christopher Jones, chief investment officer at Edelman Financial Engines — and “credit cards tend to be by far the highest.”
In fact, credit card interest rates are currently around 16%, which is significantly higher than almost any other consumer loan.
If you have a balance, try calling your card issuer to ask for a lower interest rate, switch to an interest-free credit card with balance transfer, or consolidate and pay off high-yield credit cards with a low-interest home equity loan or personal loan.
“Even if you had to borrow some of your home equity loan, you would at least be paying a lower interest rate,” Jones said.
2. Putting off big purchases
“One of the questions people should be asking is, is this the right time to make a big purchase?” Jones said. “It’s going to cost more to buy the thing and fund more.”
For large items like a house or a car, “it can make sense to move,” he said.
Even as mortgage rates are rising, the cost of buying a home is rising even more — as home price increases have more than doubled in the past year.
The same goes for buying a car. New and used car prices continue to rise amid strong demand and tight inventories and show no signs of slowing anytime soon.
3. Boost your credit score
Courtneyk | E+ | Getty Images
In general, the higher your credit score, the better off you are.
Borrowers with good or excellent credit ratings (generally anything above 700 or 760 respectively) qualify for lower interest rates, and that will go a long way when funding costs rise.
For example, reducing a new car loan by 1 percent can save up to $50 a month, according to Francis Creighton, president and CEO of the Consumer Data Industry Association.
On a 30-year mortgage, even a slightly better interest rate can mean hundreds in monthly savings.
“For someone trying to make ends meet, that’s real money,” Creighton said.
The best way to increase your credit score is to pay your bills on time or reduce your credit card balance, but there are even simple fixes that can have an immediate impact, such as: B. Checking your credit report for errors, Creighton advised.
“You want to go into inflation in the strongest position you can be.“
Subscribe to CNBC on YouTube.