Even if you don’t consider yourself a big investor who’s making large financial decisions, it’s crucial that you have an understanding of how you’ll be affected by the rise in interest rates. That’s because it will have a big impact on your personal finances, including everything from your credit card terms, home mortgage, and savings account.
As a general rule, borrowing will become more expensive, and saving will become more profitable. In this post, we’ll break down the most significant takeaways from this recent development.
Interest Rates & Credit Card DebtAs opposed to many other types of debt, the interest rate attached to your credit cards is flexible and prone to fluctuations. This means that as opposed to other types of debt, you might see an abrupt increase to your credit card’s APR which will cause your monthly interest payments to rise. If you don’t carry a balance from month to month, then the rise in your credit card’s interest rate won’t directly affect you.
But if you do have a balance, particularly if you’re one of the many millions of Americans steeped in credit card debt, then it’s imperative to take a proactive approach to becoming debt-free. Otherwise, you’ll find that your interest payments will continue growing each month until it reaches a point that you completely lose control of the situation.
One of the most effective ways of climbing out of credit card debt is to transfer your existing debt onto a credit card with a lower interest rate. By taking advantage of a 0% balance transfer offer, for example, you’ll be able to pay off your balance without worrying about the recent rise in interest rates.
Small Business Credit CardsIt’s not just individuals who will be affected by the increase in interest rates. Small companies with business credit cards can also anticipate an increase to their APR, so it’s strongly advised to pay off your company’s balance before your interest payments go up. In the same way that individuals may start feeling more pressure to climb out of debt, businesses should take a closer look at their credit card balances as well.
More Profitable SavingsAnother key takeaway from the increase in interest rates is that you’ll now earn more money with savings accounts. Recently, if you’ve had money invested in a standard savings account, then you probably haven’t earned much money with interest. The reason that your accrued interest was so low is directly correlated to the low-interest rates that were put in place since the Great Recession began several years ago.
Fortunately, the decision to increase interest rates means that bank accounts and CDs will yield more interest than they were previously. While you shouldn’t expect a monumental increase to take place immediately, you will notice an increase in savings over time.
Personal Loans, Business Loans, and Car LoansOn the flip side, since saving has become more lucrative, it also means that borrowing will become more expensive. That means if you’re looking to borrow money from the bank in the near future, the interest rate will likely be higher than if you took out the loan earlier. For example, if you’re interested in a car loan, don’t be surprised if the interest rates aren’t as favorable as they were a few months ago.
On the bright side, small businesses may not experience the same increase as with personal loans and car loans. The reason is that businesses often lend from borrowers that use a different metric than the Federal Reserve’s interest rate to set their terms, so they won’t be affected to the same degree.
Will Mortgages be Affected?The short answer is yes since the Fed’s rate increase does have an impact on the terms of mortgages. However, it’s also important to note that the increase was only a 0.25% jump, so it’s unlikely for long-term mortgage rates to be strongly affected.
Having said that, if the Feds continue to increase interest rates for a second or third time in the near future, then mortgage rates are more likely to increase as well. That can add up to a tremendous expense for new homebuyers since even a slight increase in the mortgage rate can add up to a large sum of money over the duration of the mortgage.
Pro Tip: If you currently have a mortgage that isn’t set at a fixed rate, this is a good time to consider switching over to a fixed rate mortgage. If the Fed’s continue increasing the interest rate, then your mortgage rate will go up as well, and this tactic will you allow you to preemptively protect your current terms.
Bottom Line: Rates are Going UpUltimately, the most important takeaway from the recent news is that interest rates will go up across the board. Interest rates had been set near zero in order to help Americans recover from the Great Recession, and that is no longer the case.
Since borrowing will become more expensive, it’s important to pay off your debts, especially credit card debt, before your interest rates rise. Similarly, if you need to take out a loan or a mortgage, you’d be wise to do it before interest rates rise again. On the bright side, saving money will become more lucrative than it has been, which is great news for Americans who are planning their retirements.
Most importantly, if you pay close attention to your finances and stay ahead of the curve, you’ll be able to use the new interest rates to your advantage.