Prepare your wallet for increased interest rates

For many consumers, it's easy to hit the snooze button when it comes to talk about the Federal Reserve's possibly raising short-term interest rates by one-quarter of 1 percent in mid-December. Who cares?

Throughout last year and this year, we heard dire warnings that the Fed would drive up rates, but the Fed barely budged. We had only one small rate increase, in December 2015.

Consumers would be wise, however, to prepare for the day, maybe as soon as early next year, when higher rates could cut into monthly budgets. That's especially true for those who have an adjustable-rate mortgage or a variable-rate credit card.

On a $200,000 adjustable-rate mortgage, a quarter-point rate increase could easily add about $30 to a monthly payment.

If you're the homeowner ultimately facing paying an extra $60 or $90 a month over time, a couple of rate increases would whack your wallet and, maybe, influence where you go out on date nights or how much extra cash you have to pay off student loans.

"Consumers are certainly exposed to a rate hike," said Nidhi Verma, TransUnion's senior director of research and consulting.

How vulnerable someone's pocketbook is, though, depends considerably on how much of their debt is tied to adjustable-rate products - not just mortgages, but also variable-rate credit cards, home equity lines of credit, or other loans, according to research by TransUnion.

Credit information services company TransUnion found that up to 68 percent of credit-active consumers, or up to 92 million people, would experience some level of monthly payment shock as the direct result of an interest-rate increase.

Consumers who pay their credit-card balances in full each month wouldn't be affected; the same is true for consumers with some credit cards that have already hit interest-rate caps, Verma said.

The average hit of a 0.25 percent rate increase amounts to about $6.45 a month if you spread all the borrowing on the variable-rate products, based on TransUnion's study. It looks pretty small, but the real cost to individuals will depend heavily on the types of loans and how much they've borrowed.

TransUnion's research indicated that about 9.3 million people are on the financial edge and would not be able to absorb the increase in monthly payments that would follow a quarter-point rate increase.

Given that the Fed is expected to move gradually, though, some consumers would have more of an opportunity to make adjustments to prepare and deal with the payment shock.

Two key strategies: Pay down that credit-card debt and refinance that adjustable-rate mortgage to a fixed rate if you're planning to stay in your home for the next several years.

If you've taken out a $100,000 or $200,000 mortgage with an adjustable rate, the impact of a rate increase would be greater than borrowing a few thousand on a variable-rate credit card.

"An interest-rate hike has an inconsequential effect on credit-card payments because of the ability to pay the bare minimum," said Greg McBride, chief financial analyst for Bankrate.com. "But your debt-repayment efforts go into a progressively stiffer headwind as interest rates go up."

A quarter-point rate increase would add just a buck each month to the minimum payment on a variable-rate credit card if you have $5,000 of debt on that card, McBride said.

But a higher rate would mean that it could take you two extra months to pay off a $5,000 debt on a credit card - and you're looking at an extra $107 in interest costs.

Two quarter-point increases add $2 to the minimum monthly payment. But it could take you an extra four months to pay off that same $5,000 debt and an extra $216 in interest.

Some options: Find no-interest credit cards now and pay down the debt as quickly as possible to insulate yourself from higher rates, McBride said.

When it comes to adjustable-rate mortgages, experts say, now could be the time to refinance, especially if you plan to stay in the home for the next five or 10 years.

On average, ARMs accounted for 4.6 percent of mortgage applications in August, according to the Mortgage Bankers Association.

The interest rate on 30-year fixed-rate mortgages is now roughly 3.375 percent to 3.5 percent.

Some ARMs can adjust twice a year; others, once a year.

Some offer a fixed rate for five years or seven years. So if a five-year adjustable is still protected under that fixed-rate period, the monthly payment would not bump up.