MINNEAPOLIS — Buying a house or car, using credit cards or taking out a college loan can all create debt. Adding more in the coming months is making people nervous.
“I feel like I have a clear vision of what next year will look like and now it’s really muddy,” said Eric Bergman of Minneapolis.
He was hoping to buy a house last year and even had a mortgage rate locked in at 3%. But the bidding war that drove up house prices forced him to put that plan on hold.
Now there’s another reason he’ll be waiting longer than expected.
The Federal Reserve Bank raised interest rates by 0.75% this week, causing a domino effect of rate hikes on all types of loans and debt. The current average mortgage rate in Minnesota for a 30-year fixed rate is now 5.92% according to Bankrate, a number that will likely rise due to the Fed’s decision.
“Now I feel like it could be a few years before rates maybe go down,” Bergman said.
Some financial experts, however, don’t want that number to scare people off.
“If I bought now, I would lock [the rate]“said Murray Frank, professor of finance at the Carlson School of Management at the University of Minnesota.
He says it might be better to lock in a mortgage rate now than to end up with a higher rate later. But that’s not his most prudent advice.
“It’s extremely, extremely important, if people can, to pay off those credit card balances,” Frank said.
Credit card interest rates are often the highest rates people have, and they will increase due to the Fed’s decision.
The next loans to repay would be student loans, especially if the rate is variable rather than fixed. Loans with varying interest rates have increased and will continue to increase.
“They can be very punitive,” Frank said.
He suggested people dip into their savings accounts to pay off credit card and student loan debt if possible.
If you plan to buy a new or used car, make sure the car loan is fixed. Choosing to repair the vehicle you own could also be a better financial decision.
“It’s not the kind of environment I would like to take on risky debt,” Frank said.
Frank’s summary of advice: Pay off your debts now, especially if interest rates aren’t fixed. Avoid going into debt with variable interest rates if you can.