It’s no secret that interest rates are rising. After experiencing record-low rates in 2020 and 2021, they were bound to go back up! And if you’re a consumer (hint: we all are) then these rising interest rates will affect some part of your financial situation in the short- and long-term future.
Let’s start from the beginning and discuss what interest rates are and where you may encounter and/or be impacted by them. Then we’ll give you five things you can do to help protect your financial health when interest rates rise.
What and where are interest rates?
Interest rates are the percentage amount owed on a borrowed or past-due balance. They’re present on consumer products such as mortgages, student loans, credit card accounts and more. If you’ve borrowed money or are late in paying back money, such as a utility or medical bill, odds are you’re paying it back with interest.
Interest rates are also present in checking and savings accounts, CDs, and retirement and investing accounts. This means that you’re earning more on these accounts as interest rates rise.
Why should I care about interest rates?
You should absolutely care about interest rates and here’s why: they greatly affect your monthly budget, your short- and long-term goals, and your current and future purchasing power.
While it is possible to be a consumer and not have to worry about interest rates (i.e., you’re debt free), nearly 80% of Americans are in debt with the average individual holding onto $155,000 in debt. This could be from mortgages, car loans, student loans and more. If you’re among the 80%, you need to be aware of interest rates on all your accounts.
How are the interest rates decided on my accounts?
Short answer: your credit score. Long answer: your interest rates are established based on your current credit score, your credit history, your income and ability to repay, promotional APRs, lending companies, banks, the Federal Reserve and more. You may have variable and fixed rate interest rates on your different accounts.
Currently, we’re more concerned with variable rates. For example, with variable rate products such as credit cards, you may have had a base rate of 18% (the average for Americans) but are now seeing it rise to 19% or more. This means that although you didn’t necessarily borrow more money, you’re going to be paying more money in interest. And because it’s a variable rate, you may not know how high the rate will go or when/if it will plateau. Because of this, if you carry credit card debt, interest rates are crucial to your repayment plan.
To find out precisely how your interest rate is decided on any of your accounts, contact your lender or servicing company.
Did You Know? Federal student loan interest rates are a fixed rate and are set by Congress each spring. They’re scheduled to change this fall from 3.73% to 4.99% for all new borrowers. For more information on student loan interest rates, contact your service provider.
Five things to do when interest rates rise
We’re glad you asked! Preparation is key to your continued financial success and since interest rates are estimated to continue to rise throughout 2022 and beyond, it’s important to have a plan.
Here’s a list of things you can do that will impact you today and your financial situation over time.
1. Adjust your budget. If you have debt with variable interest rates such as credit cards or student loans not owned by the government, you will see your rates rise as well as your monthly minimum payments.
Look through the past several months of your statements to see what you’ve been paying along with the interest rates. Have they increased this year? By how much? If so, the easiest and fastest thing you can do is to move funds around in your budget to accommodate these rate changes and higher monthly payments.
For instance, if you pay more than monthly minimums on fixed rate debts such as mortgages, consider using that extra to help pay down your variable rate debts. If not, it may be time to cut other areas of your budget for now.
2. Consolidate debt. Consolidated debt can be a good solution if you are carrying credit card balances on more than one card or have numerous student loans, for example. By consolidating debt, you’re essentially moving it all to one place and paying one monthly payment with one interest rate. This can help you save money immediately, pay down debts faster, and help you to be more organized with your finances.
Consider a balance transfer of credit card debt to a card with a lower rate, or better yet, consolidate credit card debt into a personal loan at a local bank with a fixed rate.
3. Refinance. For now, we’d suggest only refinancing debt that has a variable rate (credit cards, private student loans) into a loan that has a fixed rate. If you decide to do this, be aware of changing criteria with your new servicer. This could include a changed term length, higher monthly payment, and other important details.
Also keep in mind that it’s common in a refinancing situation to have a shorter-term length and to pay more each month but pay less over time. That’s the goal!
4. Keep saving. Consistently saving—and possibly saving even more if you’re able—can help pay down credit card debt and other bills, but it can also help you to build an emergency fund, build your retirement and investing accounts, or savings accounts.
We always encourage our members to save as much as they can, even if it doesn’t seem like a lot at the time. In fact, if you’re saving money in a money market account, you will benefit from these increasing rates!
Also, if you have a CD (certificate of deposit), consider transferring the funds into a money market account. You can learn more about that in our blog on the changing market. [insert back link: https://auburnsavings.com/the-market-is-changing-what-to-know-and-what-to-do/]
5. Focus on your credit score. Working on your credit score is a slow, years-long process. The small actions you do every day like pay bills on time and keep usage low, impact your credit score. To learn the basics of your credit score, read our blog How to Get Smart About Your Credit.
By taking all the proactive steps possible to gradually increase your credit score, you’re setting yourself up to be an A+ borrower which allows you the best interest rates and terms with lenders. This saves you money on everything from your credit card accounts to refinancing your mortgage and also gives you a better chance at being accepted for other loans and consumer products.
The increasing interest rates this year are not unusual. Rates rise, markets change, and economies fluctuate. These are all part of participating as a consumer and being financially independent.
And while it’s true that we can’t personally control the interest rates, we can control how we prepare for and react to how those changing rates might affect us. The more you’re aware of all your accounts and spending habits, the more you can make informed decisions and prepare for any uncertainties down the road. It may take patience and discipline, but it’s worth it and you can do it!
Sources: nerdwallet.com, premiercommunity.com, money.usnews.com, Equifax.com