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How Rising Interest Rates Affect You

October 17, 2018 | 5 min. read

It’s not a question of if, but how much, you’ll be impacted as rates change.

In the hustle of everyday life, most of us are focused on the demands of work, responsibilities at home and day-to-day concerns. So when the Federal Reserve raises or lowers interest rates, the news may be easy to dismiss as yawn-inducing fiscal policy for Washington insiders. But the reality is that rates directly affect both the lending and savings instruments on which you have built your budget.

Why Rates Are Rising

Changing the federal funds rate is a deliberate tool that allows the Fed to encourage low inflation and economic growth. The high rate of growth and low unemployment that our country is currently enjoying has caused concerns about the rising prices of consumer goods. As a result, rates have been methodically creeping upwards.

Borrowing Gets More Expensive

If you are currently locked in to a low fixed-rate mortgage, you’ll be glad to know that, as far as your mortgage goes, you’re in good shape. However, if you’re shopping for a new home or if you have a current adjustable rate mortgage on your existing home, chances are that your monthly payments are going up. In addition, home equity lines of credit are susceptible to changing interest rates, so if you have a balance on yours, you may have cause for concern.

According to research by credit reporting service Experian, the average American credit card balance is $6,375, which is almost three percent higher than the year before. Since most credit cards have a variable rate, if you have a balance on your card that you are paying off monthly, the finance charges you pay are at risk of ratcheting up. If your payments remain the same, you could get caught in a discouraging cycle of paying less toward your actual balance to cover the finance charge increase, which in turn increases the balance you owe.

It’s wise to review your student loans now, too. Federal student loans are tied to a fixed rate, so those payments should remain unchanged. But if you have additional private loans, double-check the rates and repayment terms to get a read on how you will be impacted. 

Saving Scores More Glamor Points

It’s been years since traditional saving accounts have paid account holders earnings that they can get excited about. While it’s true that rates on savings accounts and CDs are still low, they are on the rise, which may give you extra incentive to contribute to your emergency funds or other savings targets.

Take Stock Now

When interest rates change, it’s a good idea to assess your finances and determine how your borrowing and savings habits will be affected by the economic climate. If your loans are vulnerable to rising rates or you’d like to learn about optimal savings and investment strategies, contact your Financial Advisor to map out a plan.

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