As interest rates continue to rise, savers are rejoicing while borrowers may be feeling the pinch. After years of negligible interest on savings, higher rates mean your money can work harder for you. However, higher rates can also lead to increased costs and debt for borrowers. This article will provide the following:

• Tips for navigating the current economic climate.
• Maximizing the benefits of higher interest rates.
• Minimizing the impact of increased borrowing costs.
  
  

Bank Savings: Look Beyond the Big Banks

Savers, especially those with emergency funds or short-term goals like a down payment or a vacation, stand to benefit significantly from higher interest rates. However, don't expect the big banks to offer the best rates. Instead, consider online high-yield savings accounts, which can offer rates as high as 5%, which is well above the national average of 0.23%, according to Bankrate. These online banks provide FDIC insurance, protecting your deposits up to $250,000. Ensure you choose a reputable, FDIC-insured online bank for the safety of your savings.

Certificates of deposit (CDs) are another option worth considering for savers. Some federally-insured one-year CDs offer rates as high as 5.15%, compared to the national average of 1.62%. Be sure to shop around to find the best rates.

Series I Savings Bonds can also be an attractive choice for savers looking to preserve the buying power of their money. If you purchase before the end of April, you can still get the current rate of 6.89% on the I Bond. That rate stays in effect for six months as long as you complete your purchase before May 1. However, keep in mind the limitations of these bonds: a maximum investment of $10,000 per year, an inability to redeem your bond in the first year, and forfeiture of the previous three months of interest if you cash out between years two and five.

Credit Card Debt: Minimize the Bite

For those carrying credit card debt, expect a rate hike within a few statements. When the Fed raises rates, many lending rates banks charge customers tend to follow. According to Bankrate, the average credit card rate is 20.04% as of March 15, thats a record high, well above the 16.3% average at the start of 2022. Look for a good balance-transfer card with an initial 0% rate and plan to pay off what you owe over the coming months before your rate increases.

Credit card rates are at all time highs and still increasing. Take advantage of a 0% balance transfer offer, some lasting as long as 21 months. This strategy insulates you from further rate hikes and gives you a runway to pay off your debt.

If transferring to a zero-rate balance card is not an option, consider a relatively low fixed-rate personal loan. According to Bankrate, the average personal loan rate was 10.71% as of March 8. The best rate will depend on your income, credit score, and debt-to-income ratio.

Mortgage and Home Loans: Lending May Tighten

The 30-year fixed-rate mortgage has been over 6% all year, with the average rate currently at 6.6%. Mortgage rates are not tied directly to Fed rate hikes; they are influenced by movements in the 10-year Treasury yield, which is the benchmark rate for most consumer loans.

The future of mortgage rates depends on inflation. If inflation keeps dropping, mortgage rates are also expected to drift lower. However, they may not return to the ultra-low levels of previous years.

Series I savings bonds, as mentioned earlier, are another high-yield savings option worth considering. These bonds help preserve the buying power of your money. With a 6.89% rate on the I Bond available until the end of April, as mentioned earlier, this rate will remain in effect for six months if you complete your purchase before May 1. If inflation falls, the I Bond rate will also decrease.

Remember the limitations of Series I savings bonds: a maximum investment of $10,000 per year, an inability to redeem your bond in the first year, and forfeiture of the previous three months of interest if you cash out between years two and five.

I Bonds are not a replacement for savings accounts, but they can help preserve the buying power of your $10,000 if you don't need to access it for at least five years. They may also benefit those planning to retire in the next five to ten years, as they serve as a safe annual investment that can be tapped if needed during the first few years of retirement.

When it comes to credit card debt, higher interest rates can make repayment more challenging. With the average credit card rate at a record high of 20.04% as of March 15, it's essential to find ways to minimize the impact of these rates. One option is to transfer your balance to a card with an initial 0% rate and pay off your debt before the high rate kicks in in the coming months.

When considering a balance transfer, be aware of any fees you may have to pay, such as balance transfer fees or annual fees, and potential penalties for late or missed payments during the zero-rate period. The best strategy is to pay off as much of your existing balance as possible on time every month before the zero-rate period ends. If any remaining balance is left, it will be subject to a new interest rate, which could be higher if rates continue to rise.

For those unable to transfer to a zero-rate balance card, a low fixed-rate personal loan may be an alternative. As mentioned earlier, the average personal loan rate was 10.71% as of March 8, with the best rates depending on your income, credit score, and debt-to-income ratio. Ask a few lenders for quotes before filling out a loan application to secure the best deal.

Homeowners looking to refinance should be aware of the current 30-year fixed refinance average interest rate of 6.94%, an increase of 1 basis point from a week ago. Movements influence mortgage rates in the 10-year Treasury yield rather than directly tied to Fed rate hikes. If inflation continues to drop, mortgage rates may drift lower, but they are unlikely to return to the ultra-low levels seen in the past.

As interest rates rise, lending standards may also tighten, making it more difficult to qualify for a mortgage. Staying informed and working with a trusted lender or financial advisor can help you understand your options in this changing landscape.

Final Thoughts

Higher interest rates present both benefits and challenges for consumers. By understanding the current economic climate and taking proactive steps to manage debt and savings, you can successfully navigate these changes and achieve your financial goals.