How to take advantage of rising interest rates

The US Federal Reserve has already raised its federal funds rate four times since March to a range of 2.25% to 2.50%. And rates are expected to be hiked again when the Fed governors meet next month.

This means consumers will once again be faced with the question of where best to invest their savings and how to minimize their borrowing costs.

Here are some ways you can invest your money to benefit from rising interest rates and protect yourself from the downside.

Credit Cards: Minimize the bite

When the overnight rate – also known as the fed funds rate – rises, various lending rates that banks offer their customers usually follow.

So you can expect your credit card rates to increase within a few statements.

Currently, the average credit card rate is 17.85%, according to, up from 16.3% at the start of the year.

Best advice: If you have balances on your credit cards — which typically have high variable interest rates — consider transferring them to a zero-interest balance transfer card, which locks in a zero interest rate between 12 and 21 months.

“It shuts you off [future] rate hikes, and it gives you a clear runway to pay off your debt once and for all,” McBride said.

Just make sure you find out what fees, if any, you may have to pay (such as a balance transfer fee or an annual fee) and what penalties apply if you make a late payment or miss a payment during the zero-rate period . The best strategy is always to withdraw as much of your existing balance as possible – and do it on time each month – before the zero-interest period ends. Otherwise, any remaining balance will be charged a new interest rate, which could be higher than before if interest rates continue to rise.

If you’re not transferring to a zero-rate debit card, another option might be to get a relatively low, fixed-rate personal loan.

Home loans: Secure fixed interest rates now

Mortgage rates have risen over the past year and have risen by more than two percentage points since January.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 5.55% for the week ended August 25, up from 5.13% the week before. That’s almost twice what it was this time last year (2.87%) and significantly higher than at the start of this year (3.22%).

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And mortgage rates can rise even further.

So if you are about to buy or refinance a home, secure the lowest fixed rate available as soon as possible.
How much will my monthly mortgage payment be?

That is, “don’t rush into a big purchase that isn’t right for you just because interest rates might go down high. Buying a large item like a house or car that doesn’t fit into your budget is a recipe for trouble, regardless of how interest rates move in the future,” said Texas-based certified financial planner Lacy Rogers.

If you’re already a homeowner with an adjustable-rate home equity line of credit and have used part of it on a home improvement project, McBride recommends asking your lender if it’s possible to set the interest rate on your outstanding balance and effectively create a fixed-rate home equity loan. Let’s say you have a $50,000 line of credit but only used $20,000 for a home renovation. They would ask that a fixed rate be applied to the $20,000.

If that’s not possible, consider cashing out that balance by taking out a HELOC with another lender at a lower promotional rate, McBride suggested.

Bank savings: Take a look around

If you’re hoarding cash at big banks that have paid almost no interest on savings accounts and certificates of deposit, don’t expect that to change just because the Fed is raising rates, McBride said.

Because the big banks are swimming in deposits and don’t have to worry about new customers.

Thanks to paltry interest rates from the big players, the average bank savings rate is now just 0.13%, up from 0.06% in January, according to’s weekly survey of institutions on Aug. 24. The average interest rate on a one-year CD is 0.61%, up from 0.14% at the beginning of the year.

But online banks and credit unions are trying to attract more deposits to feed their thriving lending businesses, McBride said. Consequently, they offer far higher interest rates and have increased them as benchmark rates have risen.

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So look around. Today, some online accounts pay over 2%. However, if you want to switch, be sure to only select federally insured online banks and savings banks.

Another high-yield savings option

With today’s high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money. You are currently paying 9.62%.

However, this rate only applies for six months and only if you buy an I-Bond by the end of October, after which the rate should adjust. When inflation goes down, the interest rate on the I-Bond goes down as well.

There are some limitations. You can only invest $10,000 per year. You cannot redeem it in the first year. And if you pay out between the second and fifth year, the interest from the last three months will be forfeited.

“In other words, I-Bonds are not a substitute for your savings account,” McBride said.

Still, they preserve the purchasing power of your $10,000 if you don’t have to touch it for at least five years, and that’s not nothing. They can also be of particular benefit to those planning to retire in the next 5 to 10 years, as they serve as a safe annual investment to fall back on if needed during the early years of retirement.

If inflation proves stubborn despite higher interest rates, you might also consider putting some money into Treasury inflation-linked securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Equities: Aim for broad exposure and pricing power

The bewildering mix of factors at play in markets today makes it difficult to say which sector, asset class or company is certain to do well in a rising interest rate environment, Ma noted.

“It’s not just rising rates and inflation, there are geopolitical concerns… And we have a slowdown that may or may not lead to a recession… It’s an unusual, even rare, mix of factors,” he said.

How is inflation affecting my standard of living?

For example, financial services companies typically do well in a rising interest rate environment because, among other things, they can make more money on loans. But if there is a slowdown, a bank’s overall lending volume could fall.

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For this reason, Ma suggests making sure your overall portfolio is broadly diversified across equities, with some exposure to commodities, real estate, and maybe even a small amount in precious metals.

“Look at the diversification across areas that have historically performed well in rising interest rate and inflation environments,” he said.

The idea is to hedge your bets as some of these areas will prevail but not all.

That is, if you plan to invest For a particular stock, consider the company’s pricing power and how consistent demand for its product is likely to be. For example, tech companies typically don’t benefit from rising interest rates. However, as cloud and software service providers dictate subscription prices to customers, those could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Bonds: go short

If you already own bonds, the prices of your bonds will fall in an environment of rising interest rates. But when you’re in the market, buy bonds can benefit from this trend, especially if you buy short-term bonds, ie one to three years, as prices have fallen more than usual relative to long-term bonds. Usually, They move down in tandem.

“There’s a pretty good opportunity short-term bonds that are badly contorted,” Flynn said. “For those in higher income tax brackets, a similar opportunity exists in tax-free municipal bonds.”

Muni prices have fallen significantly, yields have risen, and many states are in better financial shape than before the pandemic, he noted.

Other assets that could do well are so-called floating rate instruments from companies that need to raise cash, Flynn said. The floating rate is tied to a short-term reference rate like the fed funds rate, so it will rise if the Fed hikes rates.

But unless you’re a bond expert, you’re better off investing in a fund that specializes in making the most of a rising interest rate environment through floating rate instruments and other income-focused bond strategies. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF that holds a range of different types of bonds.

“I don’t see many of those opportunities in 401(k)s,” he said. However, you can always ask your 401(k) provider to add the option to your employer’s plan.

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