How Increased Interest Rates Affect Your Finances

With interest rates being so low for such a long period of time, it is inevitable that interest rates will rise in the future.  The real question is when they will – not if they will.  However, as a result of the financial crisis, many people may have forgotten what rising interest rates mean for your finances.  For example, what affects savings account interest or other factors?  Here is what you need to know about the potential for rising interest rates.

In Banking 

In your banking, changes in bank account rates can have impacts on multiple facets of your finances.  The easiest change to remember impacts savers: rising interest rates means that banks will pay more for money in your savings account, and you can earn higher interest.  If you have an emergency fund or other savings, this means that you can earn more money.

Rising interest rates also impact your certificate of deposit rates (CDs).  As interest rates rise, so will the rates banks pay on CDs.  As such, you may want to stick to shorter term CDs, so you’re not locked in for a long time should rates rise.  

With Your Credit Cards and Loans 

Rising interest rates also have a huge impact on your credit card payments and other loan interest payments.  As rates rise, so will the rates that banks charge for loans.  Many banks rely on a simple formula for charging interest – prime rate + X%.  As such, if the X equals 10%, and the prime rate is 3%, your interest rate would be 13%.  However, as the prime rate rises, so does your interest rate.  Since credit cards almost always have variable interest rates, you will most likely see higher monthly payments and higher interest charges.

If you have a fixed interest rate on your loan, you’re set.  You’re locked in for the duration of the loan.  However, if you have an adjustable rate mortgage or other adjustable rate loan, you could see your rate start to adjust upward, which will result in higher monthly payments.

Overall, this will make borrowing more expensive in the future.  As such, if you are looking to get a loan or buy something on credit, now is probably the best time to do it since rates will be higher in the future.  

Your Investments 

Finally, rising interest rates can impact your investments as well.  First, if you own any fixed payment investments, like bonds, you will see the value of the bonds decrease as rates rise.  The reason is that new bonds will be issued in the higher interest rate market, and those will be more appealing to investors.  Bonds that pay lower interest rates will be worth less.  If you’re investing for the income, this doesn’t really matter.  But, if you will want to sell the bond or bond fund in the future, understand that you could lose money.  The best bet is to stick with short term bonds so that interest rate changes will not impact you dramatically.

As you can see, interest rates can affect numerous areas of your finances and therefore it is really important to pay attention to them.

So, do you track interest rates regularly?


Comments

How Increased Interest Rates Affect Your Finances — 2 Comments

  1. I keep fairly up to date with the latest rates as I work in business news (and every little change in mortgage rates also rates a headline in this property obsessed country…). Right now I’m all for high interest rates as I have no debt and want to get the most I can out of my cash savings.

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