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Threats to Your Debt

Posted by Advocate Debt Relief Team

6 months ago / June 8, 2022

In May, the Federal Reserve announced it would raise interest rates by half a percent to help inflation. Despite the well-intentioned effort, food costs are still rising, and gas is increasing weekly. No one seems to know when it will end, but one thing is for sure: current high-interest debt tightens the grip of inflation even more.

In past years, the Federal Reserve has used the tactic of raising interest rates to tame inflation. You need to know some implications, especially if you carry high-interest or variable interest debt. The critical first step is to understand the role of the Fed, pay attention to the decisions being made, and assess your current situation to make the best possible decision for your future.

Impact of the Fed

The core purpose of the Federal Reserve, known as the Fed, is to manage monetary policy and regulate the financial system within the United States. Among many regulatory duties, they set interest rates. The recent hike in interest rates impacts lending interest rates and annual percentage rates on bank savings.

When the Fed raises rates, credit and borrowing money come at a higher cost. Banks adjust by raising interest rates on loans and lines of credit. The intention is to push people to start spending less, create a drop in the demand for goods, and cause inflation to fall. This is a delicate balance because an adjustment too high or too little at the wrong time can trigger a recession.

Conversely, the elevated interest rates from the Fed benefit people who save. Typically, banks adjust their annual percentage yields (APYs) on their high-yield savings accounts alongside Fed adjustments. Higher rates generally mean higher yields on those accounts. So money in the bank will make you more money, but don’t count on it being enough to pay down high-interest debt.

Some analysts speculate another .75 percent increase shortly. The Fed Chair, Jerome Powell, pledged to continue raising rates until price increases come down in a “clear and convincing” way. Over the last 30 days, prices have continued to grow; however, it often takes 12 months for interest increases to be felt throughout the economy. The most important aspect of the Fed’s involvement is to be aware of any variable interest debt you carry. The oversight could cost you more than expected.

Reassess Your Finances

High-interest credit card debt and variable interest loans could be crippling in this inflationary environment. As the Fed raises rates, your bank will adjust these interest rates accordingly, driving up your monthly minimum payments and impacting your overall buying power. If you’re already struggling to juggle multiple minimum payments, now is the time to get ahead.

Fixed interest rates remain the same for a set period. These can be set for a portion of the loan term or over the entire duration of the loan. Fixed rates avoid the risk of a significant increase over time and truly save you in the economic hard times we’re seeing today. Double-check to ensure the fixed rate doesn’t change over time. If it does, talk with your lender about the pending increase, when it will take place, and how much it will be. 

Beware of variable interest rates! These interest rates fluctuate over time and can adjust to the change of the Fed. Carrying debt like this can be detrimental unless you address it before inflation worsens. Minimum payments are likely to rise, so evaluate your obligation to verify the type of interest rates you have and create a plan to resolve it.

Tips to Manage

The last thing you want during uncertain financial times is to make your situation worse. First, it’s vital that you stay away from accumulating more credit card debt. Rolling over your debt each month, given that credit cards have a variable interest rate, will get more and more expensive. 

Although the student loan forgiveness program might seem like a way out of crushing debt, don’t bank on it. As of 2021, less than 0.6 percent of the total outstanding student loan debt balance was forgiven. Understand that the parameters for forgiveness are lengthy and complicated to attain.

Take a hard look at your reoccurring expenses and assess where you can trim. Services like car insurance, cell phone, and cable/internet can often be negotiated with the provider to get a lower rate. It may take calling several other providers to get them to budge, but a little time spent researching can shave valuable dollars off the bottom line.

Review your retirement investments. When we set up that retirement portfolio, many of us set it and forget it. Bear in mind that these investments can be impacted by inflation as well. It might be time to rebalance and diversify these investments, so dusting off that password to review your performance could save you in the long term.

Help is Close By

Finances can be complicated and often overwhelming. If you’ve tried to make a plan and it doesn’t seem to be yielding results, consult with the professionals at Advocate Debt Relief. Knowledgable, friendly analysts are standing by to help pave the way to your financial freedom today.

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