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What an interest hike would mean for credit card holders, mortgages, student loans

A MARTINEZ, HOST:

All right, how does a potential shift in Federal Reserve policy impact your personal finances? The central bank is indicating that it is likely to hike interest rates next year in an effort to contain high inflation. So to discuss what that could actually mean for you, we've called upon Michelle Singletary. She's a personal finance columnist for The Washington Post. Michelle, let's start with something most of us rely on each and every single day, and that's credit cards. So what do these interest rate hikes mean for people who put a lot of charges on a credit card?

MICHELLE SINGLETARY: Yeah, it means that if you are revolving that credit card balance, next year you can expect to pay more for that - those charges you have on that card. And so basically what the Fed has said to those borrowers, people who can't pay them off, is that you need to pay that money off now because you will be paying more to carry those charges in 2022.

MARTINEZ: So if I don't need those extra sneakers, Michelle, go ahead and...

(LAUGHTER)

SINGLETARY: Yeah.

MARTINEZ: ...Make that payment?

SINGLETARY: That's right.

MARTINEZ: Yeah.

SINGLETARY: You know, people are still doing last-minute holiday shopping.

MARTINEZ: Yeah.

SINGLETARY: And I just want them to take a pause. If they have debt already, just don't do it. You know, you can love people with your presence, not your presents, if you are carrying that debt.

MARTINEZ: How will people know I love them if I don't buy them gifts?

SINGLETARY: (Laughter).

MARTINEZ: All right. Real quick, Michelle - what about if you're a homeowner with a mortgage?

SINGLETARY: Yeah, you know, it will affect those who have adjustable-rate mortgages. Typically, you have a period where it's stabilized. It doesn't go up. And then it will go up on an annual basis. If you've got an ARM that adjusts, is in the period where it's going to adjust, then you are going to end up paying more. You're going to end up paying more if you have a home equity line of credit.

MARTINEZ: What if you're wondering whether to refinance your mortgage?

SINGLETARY: Well, this is the time to do it. If you were on the fence and it makes sense for you financially, you should refinance now before the rates go up because you're going to end up paying a little bit more.

MARTINEZ: Now, what about college students or maybe people who are trying to pay off the cost of their education? The government paused student loan payments because of the pandemic, but that only runs through the end of January. So, Michelle, what should people look out for there?

SINGLETARY: If you're going to - that's going to impact people who are taking out new loans or have adjustable-rate loans as well. So if - basically, if you've got debt that adjusts, the Fed rate increases are going to impact you. So you want to think carefully about the debt that you're carrying and debt that you might take on, as the Fed has indicated they're going to increase those rates next year.

MARTINEZ: I know the stock market, Michelle, seems to like what the Fed is suggesting that they might do.

SINGLETARY: Yeah.

MARTINEZ: So what if you're heavily invested in the stock market, say, in a 401(k) or something like that?

SINGLETARY: Yeah, don't worry about what the Fed is doing. I mean, basically, if you're investing for your retirement or you've got money in a 529 plan for your kid's college fund, you're not - if you try to figure out what to do based on what the red benchmark (ph) is going to do, you're basically trying to time the market, and that just generally does not work. So just have a plan for your retirement and for those kids' college money, and stick to that plan, and don't worry about the roller coaster ride of the stock market. Just stick to your plan, and you'll be OK.

MARTINEZ: So really quickly, it seems like the short-term plan at least is to try and, as best you can, lighten your load as much as you can.

SINGLETARY: That's exactly right. If you've got debt, get out of it now - ASAP. That should be your No. 1 New Year's resolution for 2022.

MARTINEZ: Michelle Singletary is a personal finance columnist for The Washington Post. Michelle, thanks a lot.

SINGLETARY: Thank you.

(SOUNDBITE OF KORESMA'S "CLOUDS (INSIGHT VOL. 3)") Transcript provided by NPR, Copyright NPR.