MW The smartest money moves to make with interest rates expected to go higher

Andrew Keshner

The Fed's next interest-rate hike is going to 'bite' consumers. Here's how to prep your money.

The Fed is expected to raise its benchmark interest rate. If that happens, here's the guidebook for consumers to make the best of it.

The Fed appears to be nearing its first interest-rate hike in three years, yet the finances of many Americans are far from where they were the last time rates went up. That means they'll have to come up with a different game plan to make the best of increasing rates this time, economists and financial experts say.

A lot has changed since the Federal Reserve launched a series of rate hikes in early 2022 that concluded in late 2023 - but not much has become cheaper.

Americans are deeper in high-cost credit-card debt and they're paying steeper interest rates on consumer loans compared to back then.

"This one is definitely going to bite consumers," Mike Reid, head of U.S. economics at RBC Capital Markets, told MarketWatch. That's particularly the case for younger consumers, as well as lower- and middle-income households, he said.

The Fed cut its benchmark rate from late 2024 to late 2025, but that didn't make a dent on households' interest payments, Reid said.

Here's a look at the percentage of disposable income that's going to non-mortgage interest payments for products like credit cards, auto loans and personal loans:

"What's concerning is, despite all the cuts, that interest burden has really moved sideways," Reid said. "That's where the interest-rate hike will bite first."

Treasury yields, which underpin the rates on new mortgages, auto loans and several other forms of consumer credit, have climbed appreciably since early 2022.

The speedy rise of yields this year - particularly in recent months - has ratcheted up the pressure on borrowing costs. The yield on the 10-year Treasury note BX:TMUBMUSD10Y was hovering around the 5% mark as of Tuesday, far from its 4% level at the start of the Iran war in late February. It's also well above its roughly 2% level in March 2022, when the Fed started its last batch of hikes.

Beyond consumers' borrowing costs, their energy prices are rising, led by record-breaking prices on diesel fuel, as conflicts in Iran and Ukraine continue. Meanwhile, food prices are facing new pressures. Households with student loans have less wiggle room than they did, ever since payments resumed in late 2023.

That's all before the Fed's Wednesday meeting. As of now, the Fed is expected to raise its benchmark interest rate, and more hikes could follow.

This time around, the consumer's game plan to handle any Fed rate increases may have to include putting an extra-sharp focus on managing household debt - especially the floating-rate debts like credit cards.

"Last cycle's playbook was lock in cheap fixed debt while it existed," said Matthew Chancey, founder of Tax Alpha Companies. "This cycle's playbook is shrink the floating balance, because it was expensive before the hike ever arrived. ... The Fed decides what rates do next. You decide how much of your life floats."

Making a "debt inventory" is an especially good move now, said Rick Kahler, founder of Advance Wellbeing Financial Therapy. People can tally all their debts to see the cumulative monthly amount, as well as the rates and which debts have fixed borrowing costs and which are variable.

As Kahler sees it, paying the debts with the highest rates first is the way to go. For many, that's often their credit card. "You've got a little window of time to plan," Kahler said. "That's why doing this proactively is important."

Credit-card balances will get more expensive. There are ways to cut the costs.

Start with credit cards, where annual percentage rates are closely linked to Fed moves.

The APR on a credit card with a balance was nearly 18% in 2022, according to Fed data. Now it's over 22%, despite the rate cuts since then. Americans owed roughly $840 billion on their credit cards in 2022's first quarter, according to the New York Fed. Now, the bill is $1.26 trillion.

With any Fed hikes this time, "the starting period is a more leveraged consumer, a consumer with more debt on their balance sheet," said Charlie Wise, senior vice president of research and consulting at TransUnion (TRU).

Finding ways to reduce credit-card balances and reducing credit-card usage that can't be repaid monthly are "going to be even more important now," he said. Though it's always best to avoid or at least minimize long-lasting card balances, Wise said "it's maybe a bit more urgent."

With balance-transfer cards, people can move existing credit-card debts to new cards and interest will not accrue for a set period of time. A percentage of the amount may be subject to a transfer fee. APRs come back after an interest-free introductory period, which can typically last from six to 21 months.

These cards can help if the cardholder uses the introductory period as a chance to pay off the debt, instead of taking a break from paying interest.

Balance-transfer cards may be the right fit for someone paying off up to $6,000 in card debt, said Ted Rossman, principal consumer finance analyst at Money Management International, a nonprofit credit-counseling organization. That's typically the limit on transfers, he said.

Another strategy is taking out a personal loan to pay credit-card debt. A personal loan's interest rate was nearly 12% in the second quarter, according to the Fed. That's around half the average rate of the APR for a credit card with a balance.

Many people are making the move. There was a record $281 billion in outstanding personal-loan balances during the second quarter, nearly 10% year-over-year growth, according to TransUnion.

The catch for consumers is making sure they can repay the loan. Nearly half of new clients coming to Money Management International through June had a personal loan on their credit report, said Rossman.

In a time of rising costs, the danger is repaying old debts by using new debts and not breaking the cycle, said Rossman. "You really have to do the math and you really have to be disciplined about it," he said.

Mortgage rates could rise. That could help buyers.

The Fed doesn't set mortgage rates; they tend to follow the yield on the 10-year Treasury. For several years now, mortgage rates have been largely stuck between 6% and 7%, pushing up the cost of most Americans' single biggest expense, housing.

Higher mortgage rates have prevented many aspiring home buyers from entering the housing market and stopped existing homeowners from refinancing to less-expensive mortgages.

The 30-year fixed-rate mortgage rose to 7.17% on Monday, a 20-month high.

The Fed and its chair, Kevin Warsh, can still make a difference, said Jeff DerGurahian, loanDepot's $(LDI)$ chief investment officer and head economist.

If bond investors think the Fed's move "will contain inflation rather than mark the beginning of a long series of increases, mortgage rates could remain steady or even move lower," DerGurahian said. "It may sound counterintuitive, but when markets already expect the hike, the message accompanying it can matter more than the move itself."

It remains to be seen how investors react to Wednesday's meeting. But if rates stay higher for longer, some buyers may be able to use that to their advantage, DerGurahian said.

"In many areas, there are currently more sellers than buyers, creating opportunities to negotiate on price or seek concessions that could outweigh the monthly payment difference between a 6.5% and 7% mortgage."

Cash looks better, but keep priorities in place

Higher returns on cash are a bright spot with a rate hike. Getting money back on a conservative investment in an anxious time has its appeal.

So far this year, rising inflation rates have been chipping at the real returns people can get in high-yield savings accounts and CDs. Though many HYSAs are still at 4% and above, inflation cuts away the real yield.

By shopping around, savers may find better rates from banks that are hungry for deposits in a Fed hike.

Don't fixate on cash, though. It's important to find a way to devote some money to rainy-day savings, but fighting credit-card debt should take priority over building a cash stockpile, many financial advisers said.

"Paying off 20%-interest-rate cards where you carry a balance is priority 1, 2, and 3," said Jake Ridley, founder of Ridley Wealth Management in Round Rock, Texas.

"Carrying balances on those accounts is a flashing red light that changes need to be made to your budget. Don't burn calories worrying about 3.75% vs. 4% when you are paying 20%."