By MONEYWATCH November 16, 2015, 5:30 AM
It's almost unanimous: Economists believe the Federal Reserve will start raising short-term interest rates in December.
A rate hike has been long in coming, given that the central bank has kept rates near zero for seven years to help the economy recover from the Great Recession. Some younger millennial workers may not even remember the last time savings accounts actually earned anything other than minuscule interest rates and when mortgage rates were higher than 5 percent.
About 9 out of 10 economists recently polled by The Wall Street Journal said they expect the Fed to boost short-term interest rates at its Dec. 15-16 policy meeting, and Fed Chair Janet Yellen has said she expects a rates liftoff sometime this year. While the central bank has signaled a slow-and-steady approach to boosting rates, the next few weeks nevertheless remain a good time to reevaluate some personal-finance goals and circumstances, and to make decisions before rates start their inevitable climb.
"While nobody is expecting this rate increase to be big, what consumers need to recognize is that more than likely this is a first of a few rate hikes that will come," said Matt Schulz, CreditCards.com senior analyst. "The sum total of those hikes will end up being potentially significant, so it's time to think about what to do."
When the Fed boosts rates, it becomes more expensive for banks to borrow money, which ultimately gets passed onto the consumer. That means higher interest rates on commercial products such as credit cards and mortgages.
Below are five moves consumers may want to make ahead of the Fed's first step to tighten its monetary policy.
Pay down credit card debt. If you can, pay down as much as possible, given that credit cards will start to hike their interest rates soon after the Fed makes its move, Schulz noted. "Even a small increase means money out of your pocket," he said.
Take advantage of zero-percent balance transfers. It's still easy to find these offers, so consider taking advantage of one now, especially if you can't quickly pay down your current credit card debt. If you're struggling to pay off your cards and have a high APR card, Schulz said, it could be time to think about one of these cards. Some of the best zero-percent balance transfer options include Slate from Chase and Capital One QuicksilverOne Rewards, according to a new CreditCards.com survey.
Refinance your mortgage. While mortgage rates are still near record lows -- and the Fed's boosting of short-term rates has only an indirect impact on long-term rates -- the Mortgage Bankers Association sees 30-year fixed mortgage rates rising to 4.5 percent next year and 5.2 percent in 2017. For homeowners with an adjustable-rate mortgage, it's an especially good time to consider refinancing into a fixed-rate loan.
Consider becoming a first-time homebuyer. Given the Mortgage Bankers Association forecast for rates to rise over the next two years, now could be a good time to take the plunge into homeownership, considering the still relatively cheap cost of capital. At the same time, the National Association of Realtors forecasts home prices will continue to rise in 2016. That means buying a home may become more expensive next year on two fronts: borrowing as well as the price of the home.
Reevaluate your asset allocation. Diversification is increasingly important when interest rates rise, according to JPMorgan Chase. For instance, the value of bonds declines when interest rates rise. That might not matter if you plan to hold the bond until maturity, but it could lead to a loss if you need to sell before that point. Because of these issues, it's especially important to examine your goals and asset allocation to make sure they're aligned.
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