Rising Interest Rates: The Good, The Bad & The Ugly

During December the U.S. Federal Reserve announced an increase in interest rates.  The Fed raise the benchmark federal funds rate from the most recent range, between .25% and .5%, to a new higher range .5% and .75%.

The Federal Reserve’s decision about interest rates will have a direct effect on you.  An increase in interest rates affects the prices of goods at the store and how quickly the prices go up (i.e. inflation).  In addition, they have a direct effect on the money in your savings account, the interest rates you pay on credit cards and loans, and how much car or home you can afford.

Rising Interest Rates: The good, The bad, & The ugly

The Good: Savings Accounts

Let’s start out with the good!  The good part is that higher interest rates often mean that your bank will increase the interest rates offered on saving and checking accounts.  Interest rates have been so low for so long that most banks are hardly paying any interest.

Consider switching to an online bank to take advantage of even higher interest rates.  Historically, online banks have offered lower fees and high-interest rates because they don’t have as many overhead costs as traditional brick and mortar banks have.

 

The Bad: Student Loans & Credit Card

Now that we have looked at the good, let’s take a look at the bad.  If you carry a balance on your credit card, then your credit card interest rate will probably be the first increase that you will notice.  In order to avoid paying the increase in interest rate, consider a balance transfer.  A balance transfer is when you transfer your high-interest rate debt to a credit card with a promotional 0% offer.  During the promotional period, you can pay off the balance of the credit card without accumulating interest (as long as the credit card is paid off in full prior to the end of the promotional period).

Honestly, most people with student loan debt would not see a change with the increase of interest rates.  That’s because federal student loans have fixed interest rates set by the government.  However, certain student loans have variable interest rates.  Those student loan borrowers may see the interest rates on their loans go up.

Since interest rates have been low for so long, it has been a great opportunity for certain student loans borrowers to refinance their debt.  Refinancing your student loans mean that you get another bank or lender to purchase your student loans and then you pay the bank or lender back at a better interest rate.  Therefore, if you are considering refinancing your student loan debt you will see an increase in the interest rate from what it was just a few months ago.

 

The Ugly: Car & Home Buying

Last, but of course not least, let’s take a look at the ugly.  The bad part about interest rates rising is that you are going to pay more money when getting a loan on a car or home.  Since a home is such a large purchase, even a small increase in interest rates can have a major impact on your monthly bill.  For example, a $200,000 mortgage at 4.75% costs almost $100 more each month than a $200,000 mortgage at 4%.

Don’t let the increase in interest rates stop your dreams of owning a home or buying a car soon.  Keep the following things in mind:

  • The best interest rates for any consumer loan product are given to those with the very best credit scores.  If you will be in the marketing for a new home or car, make sure you have pulled your credit score.  In the event there are any discrepancies, get those resolved as soon as possible.  In addition, work on improving your credit score by paying off debt and not opening new lines of credit until you need it.
  • The sooner you act the better.  The Federal Reserve has stated that there will be future interest rate increases.  Although many economists have speculated that the increases will be slow, it is better to save money and get the lowest interest rate possible.
  • If you’re in a good place financially and feel ready to purchase a home, start looking now.  Many future homeowners have started to speed up their homebuying process in order to get the lowest interest rate possible on their loans.

 

Have you considered how the increase in interest rates will affect you?

 

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One comment

  1. As soon as Trump was the elected interest rates on mortgages went up, I definitely bought down my points to keep my interest rate under 4%. Your mortgage payment might be crazy especially if you don’t put alot of money down. I can definitely see those rates rising as he is in office. Also, this article came right on time because I got an interest rate increase on my student loan yesterday. My goal is to definitely pay that off this year even more after receiving that piece of information. Thanks!

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