How Interest Rate Increases Affect the Economy
When the central bank starts raising interest rates, you will see its effects on credit card debt, mortgage rates, and auto loan rates. According to the American central bank, American households’ debt in mid-2021 was over $16,000, excluding mortgages. Much of this debt is credit card debt and home equity lines of credit, and individuals with this type of debt are more affected by rising interest rates.
Paying Off Credit Card Debt
If you are only paying the minimum on your credit card debt, start paying more. If you can’t save money to increase payments, start budgeting or reduce your current budget, cut spending, and use the money saved to pay off credit card debt. For help with budgeting, learn some budgeting basics.
Protecting Your Invested Money
When interest rates start to rise, you can take advantage of this by placing your money in certificates of deposit. However, as rates continue to rise, you don’t want your money to be locked up, for example, in a five-year certificate of deposit at a lower rate. In a rising interest rate economy, consider using a “laddering” technique, which involves purchasing certificates of deposit with staggered maturities. This gives you the opportunity to reinvest your money at higher rates when the certificates mature.
Don’t Be Fooled by Fixed-Rate Credit Cards
Your credit card issuer is legally required to give you written notice before raising the interest rate. Nevertheless, if interest rates are expected to rise and you haven’t transferred your balances to cards with lower rates, you should consider doing so, looking for those that promise a low rate for a specified period.
Consider a Mortgage Over a Line of Credit
If you have a home equity line of credit, consider getting a mortgage to pay it off if interest rates are expected to rise. Since interest rates on home equity lines of credit are tied to the prime interest rate, if rates rise, the interest on your line of credit will also increase.
Choose a Fixed-Rate Mortgage Over an Adjustable Rate
If you have an adjustable-rate mortgage and plan to stay in your home for at least five years, consider refinancing to a fixed-rate mortgage when interest rates are expected to rise. You should also know how to take advantage of low mortgage interest rates.
Buy a House Sooner Instead
With rising mortgage rates, you will be able to buy a less expensive home for your money. If prices are expected to rise and you are in the market to buy a home, consider ramping up your search efforts. Make sure to research real estate trends in your area so that you don’t buy during a period of rising home prices.
Buy a Car Sooner Instead
Similar to buying a house, if you are in the market to buy a new car, consider speeding up your plans before interest rates rise, possibly taking advantage of financing at 0%. These offers often disappear as prices rise. Look for other ways to save money on your next car as well.
Sources:
– The American Central Bank
– The Federal Reserve Bank of New York
– The Federal Deposit Insurance Corporation
Source: https://www.thebalancemoney.com/prepare-now-for-rising-interest-rates-1289604
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