What Rising Interest Rates Could Mean for You
We’ve all felt the sting of inflation in recent months. Due to a variety of global factors affecting the economy, prices have risen at the gas pump, grocery store and many other places we purchase goods and services. The Federal Reserve is hoping to help bring those prices down by increasing the key interest rate — the rate many lenders use as a basis for setting their own interest rates.
The Federal Reserve has increased the key rate seven times in 2022, with more increases likely to come in 2023, as inflation persists. The effect of these rate hikes has made it increasingly expensive for consumers to borrow money and carry credit card balances. The Federal Reserve’s intent is to encourage us to spend less, causing a decrease in demand that may eventually drive prices downward.
In the meantime, American consumers are tasked with navigating these rising-rate conditions. Understanding the challenges and opportunities associated with higher interest rates can help us manage our own finances to make the best of the current environment.
The pros and cons of rising interest rates
While borrowing becomes more costly as interest rates rise, saving becomes more lucrative, as higher rates enable savers to earn more. Here’s what happens to loans, savings and outstanding credit card debt when interest rates rise.
Loans: If you have an existing personal loan with a fixed interest rate, your loan will not be affected by rising interest rates. A fixed-rate installment loan locks in the interest rate available at the time the loan is taken out. Borrowers have the assurance that their interest rate and monthly payment will remain constant throughout the life of the loan. That’s also true if you take out a new fixed-rate loan, although the interest rate you lock in today is likely to be higher than what you may have qualified for just a few weeks or months ago.
If you have a variable-rate loan, such as an adjustable-rate mortgage (ARM), the interest rate on your loan is set up to fluctuate with the key rate (or another financial index) after a specified period of time. For example, a 5/1 ARM maintains a fixed interest rate for the first five years; after that, it becomes subject to adjustments based on index ups and downs. If your variable-rate loan is still in its fixed-interest period, today’s rising rates won’t affect your interest or monthly payment. However, if that fixed-rate period has passed, your interest rate and payment may increase in the rising-rate environment. Similarly, your rate and payment have the potential to decrease in the event the key rate falls.
Savings: Higher annual percentage yields (APYs) on savings accounts, interest-bearing checking accounts, certificates of deposit (CDs) and money market accounts reflect the positive side of rising interest rates, as many financial institutions raise the interest rate you earn on savings.
Credit Card Debt: Credit card debt gets more expensive with rising rates. Most credit cards have variable annual percentage rates (APRs) that fluctuate with the prime rate, which is tied to the key rate. When the Federal Reserve raises that rate, credit card companies raise the APRs they charge on outstanding balances. If you don’t carry a balance on your credit card — meaning that you pay your balance in full and on time each month — you won’t be affected by rising rates.
If you do carry a balance, you’re likely to pay more in interest charges, costing you more and potentially extending the length of time it will take you to pay off that debt.
Steps you can take to ease the pain of rising rates
You can empower yourself to minimize the negative impacts and maximize the positive impacts of rising rates. Here are some ideas to get you started:
Pay down your existing variable- and high-interest debt. Make every effort to reduce the amount of debt you have that is subject to rising rates. Rates are expected to continue increasing in the near term; address your vulnerable balances now by paying them off or down.
Consider a debt consolidation loan. For high-interest debt you can’t immediately pay off, explore whether you could save by consolidating your debt under a lower-interest loan. Dollar Bank’s debt consolidation calculator can help you determine how much you might save in terms of total cost, monthly payments and the number of months it will take to pay off your debt.
Pay your credit card balance in full each month. Don’t spend more than you know you can pay off when your credit card statement arrives.
Be thoughtful about borrowing. If you need to take out a mortgage, auto loan or other type of personal loan, consider your options carefully. Your lender can help you analyze which choice may be the best for your circumstances, taking into account factors such as how much flexibility you have in your monthly budget, how quickly you plan to pay your loan off and, if the loan is a mortgage, how long you intend to stay in the home.
Save! Make the most of rising interest rates by putting as much as you can into savings. Look for savings accounts or CDs that meet your needs and circumstances, and consider a checking account, such as Dollar Bank’s Everything Checking account, that pays interest on your checking balance.
Build your credit score. Borrowers with higher credit scores tend to be charged a lower interest rate than those with lower scores. In a rising-rate environment, you’ll want to give yourself every advantage, including making on-time payments, keeping your credit utilization ratio (credit in use compared with credit available) under 30% and taking other steps to boost your credit score.
If you’d like more information about loans, deposit accounts or credit cards, call Dollar Bank at 1-800-242-2265 or visit your local branch.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.
Posted: December 13, 2022