3 personal finance tips to weather rising interest rates
The R word — recession — has been thrown around a lot lately.
It was a concern even before two bank failures this month, and the Federal Reserve increased interest rates once again Wednesday. Alan Gin, an associate professor of economics at the University of San Diego's Knauss School Business, said there is still a 60% chance of a recession happening this year.
He advises people take a serious look at their financial situation.
"I think people should be cautious at this point. There's still a stronger possibility of a recession than not," Gin said. "People should try then to get their financial house in order."
What you should know
Higher interest rates mean it will be harder and more expensive to borrow money.
- Lines of credit will tighten up
- Mortgage rates will go up
- Car loan rates will go up
- Credit card rates will go up
- Adjustable mortgage or a loan monthly payment will go up
- A credit card's minimum monthly payment will go up
The Census Bureau says almost 40% of Americans use credit cards to pay for necessities.
The average credit card interest rate is now over least 24.10% according to Forbes.
Matt Ficco the CFO of California Coast Credit Union, the oldest credit union in the county, said that is exactly what they are seeing.
"We're seeing a drain on savings and a drain on checking accounts and an increase on credit card balances," Ficco said. "So that tells us consumers are using the funds that they had saved up for daily expenses. And now they're actually tapping into their credit card balances."
Ficco said that is a dangerous place to be in when credit is tightening and rates go up.
Three things to do now
Ficco recommends three things to be in a better position if a recession does hit.
1) Talk about finances and be honest about debt
"We made a list of all of our expenses for the month and we classified them as necessity and discretionary. So we already know which expenses we can cut if that time comes," Ficco said.
Be aggressive and cut what the family does not need.
"Tighten in the belt a little bit. Do, we really need to go out to dinner on Friday night or do we really need to spend some extra stuff?" he said. "If not don't do it."
2) Make a plan to pay off debt and save
"Focus on doubling up your payment on your credit card bill, focus on paying down your home equity line of credit because those rates do adjust up and most importantly, and this is something we stand by all the time, continue saving for that rainy day fund," Ficco said.
3) Get financial counseling whether you need it or not
It is never too early or late to get help from an expert, and often times a bank or credit union will offer the service for free.
"Get proactive talk to the professional financial counselors before that time comes, if you're already feeling a pinch or you're in a pinch or you're just concerned about the pinch coming up," Ficco said.
And while it will hurt in the short term, being debt-free and having a savings cushion will alleviate stress and prevent financial catastrophe.
"We'll find the best solution for you to help you get through this situation and avoid getting into those areas where you're having to turn over the keys to their car, or God forbid that, you know, turn over the keys to your house," Ficco said.
Bonus: Ficco said avoid pulling money out of retirement accounts because there will be a fee and it might not be worth it. And do not stop paying into the account, it is a habit he recommends keeping.