So the Fed is raising rates quickly. What does that mean to you?

Basically, debt just got more expensive and harder to get. If you carry a balance on credit cards, the rate has likely jumped 2% or more. Mortgage rates that were 2.5% just a few months ago are now at 5.7% and new auto loans are now more expensive. Rates will continue to climb.

Why is the Fed raising rates so much so quickly?

The Fed is trying to put the brakes on inflation. To do this, they need to severely curb the money supply. They do this by raising rates and this will slow the economy. The hope is to take the economy to edge of recession without actually creating one. Historically, this has been difficult to do.

Why did the Fed take so long to act?

The fed deemed some inflation to be fine to get the economy jump started coming out of the Covid era. The Fed’s failure to act quickly coupled with the government over stimulating the economy has led to the inflation we see today. The “fix” won’t be easy and will certainly be painful for many.

So what should I do?

Avoid taking on new debt, eliminate consumer debt if you can, and prepare for an economic slowdown

For some taxpayers, tax planning is almost impossible. Not only do the rules seem to change year to year but their income and tax situation also change year to year. However, for the vast majority of taxpayers, this is not the case and tax planning is pretty simple.

If your income and deductions are pretty stable year over year, simply pull up last year’s tax return and look at the amount of tax you paid (not your refund or balance due but the actual tax paid). Are you on track to pay that amount this year? If you are going to be short, you can increase your withholding amounts to help cover the shortfall prior to year end.

For parents, the biggest surprise at tax time may be when a child is no longer eligible for the child tax credit. In 2021 this credit became 3,600 for children under 6 and 3,000 for children under the age of 18. So a parent who received these credits in 2021 has to plan for the loss of the credit (or part of the credit) if their child no longer qualifies.

The other item that can trip up folks is the one time event they failed to tax plan for. So you finally hit the slot machine or lotto for a big payout, you sold a property, you got a big bonus, etc. These things are all great but can trip you up at tax time. That one time event may put you in a higher tax bracket and/or cause you to lose tax credits and deductions which can make the tax burden much higher than expected.

So if your income stream and family situation is pretty stable, tax planning can be fairly easy. However, be aware that any change in your income or family situation may involve actually crunching some numbers to avoid a big surprise come tax time.

While cancelling a credit card does not, in itself, have anything to do with your credit score, it can impact it in 3 ways which you should consider before doing so

The impact on your credit score (in order of importance):

1 – Credit utilization can be impacted.

Supposed you have total credit of 30,000 and have a credit balance of 3,000. That’s 10% utilization which is deemed good by most creditors. Now, if you have a 20,000 limit card that you cancel leaving you with 10,000 of credit, suddenly credit utilization jumps to 30% and that can have a significant impact on your credit score even though the amount of debt never changed. You always want to try to keep credit utilization on any card and in total under 10% to maximize your score.

2 – Length of credit can be impacted

Your credit score considers your length of credit. The longer the better. So if you have been carrying around that card you want to cancel for 20 years, cancelling it may significantly reduce your overall length of credit and impact your score. Thus, if you have an account that has been open a very long time, it is best to keep it open unless there is a good reason for closing it.

3 – Variety of credit can be impacted

Your credit score and lenders consider the types of credit you have and a variety is considered a good thing. So having that odd department store credit card that you applied for on a special promotion isn’t a bad thing and can help out your score. While you may never use the card anymore, you should think twice before cancelling if it adds to your overall credit mix.

Many people reach a point where they want to limit or consolidate their credit cards and there is nothing wrong with that. However, it is important to know the impact it may have on your credit score at least in the near term.

In my blog post “Sometimes… you should take the deal” I shared how the airline (American) offered us 60K miles to sign up for their credit card and that I was somewhat astounded that more people didn’t take advantage of the offer. In that blog I said it it were offered, I would do it again. Well…

I used those miles for 2 free round trip fares to Las Vegas and, during that flight, they offered the deal yet again and I had my wife sign up this time. Again this is a small hit to the credit report for a hard inquiry but that is rather trivial. She was instantly approved and awarded the miles (the card also means your checked bag is free and you receive priority boarding).

Using those miles, I just booked a free trip to New England with enough miles to spare for yet another free ticket in the future.

In times of inflation, when everything seems to be going up, taking advantage of these kinds of giveaways and perks is definitely worth doing.