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By Barbara O’Neill, Ph.D., CFP®, [email protected]

Computer, paper, and pencils on a white table.

Photo by Nataliya Vaitkevich on Pexels

In March 2022, the Federal Reserve approved a 0.25% interest rate hike, its first increase since December 2018. As interest rates continue to rise, it is important for military families to plan ahead, especially those with variable-rate debt and those looking to make large purchases.

In last week’s blog post, we introduced the first five of ten steps to reduce debt before interest rates rise (again). Below are the last five of 10 debt-reduction strategies that Personal Financial Managers can suggest to clients to try to reduce borrowing costs and mitigate the effect of higher debt payments resulting from higher interest rates:

  • Consider Refinancing. Like balance transfers, refinancing from an adjustable (variable) rate loan (e.g., an adjustable-rate mortgage or ARM) to a fixed-rate loan only works if interest savings is greater than refinancing costs. The math often depends on how long someone plans to live in a house, which is dicey for military families with frequent PCS moves. Those with a brief time left in military service and a desire to return to a certain house might consider this.
  • Act Sooner Than Later. Clients waiting to make “ big ticket” purchases may want to apply for financing as soon as possible to lock in a fixed rate on a loan before interest rates rise. The Fed has already announced its intention to make six more quarter-point interest rate increases throughout 2022. That’s 1.5% more added to current borrowing costs!
  • Maintain a High Credit Score. In addition to market interest rates influenced by Federal Reserve action, another factor that affects interest rates charged to consumers is credit scores. Those with higher scores generally pay a lower rate of interest. According to the Consumer Financial Protection Bureau, “the best rates go to borrowers with credit scores in the mid-to-high 700s or above [on a FICO score scale of 300 to 850].” Having good credit can pay off.
  • Consider Savings Angles. One way to “find” money to accelerate debt repayment is to earn more on savings and investments. Online bank accounts are poised to pay slightly higher returns as higher market interest rates kick in. Conversely, long-term bonds will likely experience large losses as interest rates rise due to interest rate risk.
  • Stay Current on Interest Rates. Interest rate changes made by the Federal Reserve are easy to monitor because they are widely reported by national news and financial media. Clients also need to pay attention to interest rate changes that are subsequently “passed through” by their creditors. For example, a higher APR on a variable rate credit card.

In summary, now is a “teachable moment” about credit, interest rates, and debt pay-off strategies. Make the most of it!