How Climbing Interest Rates Will Affect Your Finances – Guest Post
30 year fixed mortgage rates are around 4.75%, which is an almost 1.5 increase from their 52 week low. Financial experts expect interest rates to continue to climb over the next year or two before leveling off. There are certain things that should be watched in order to keep your money protected as interest rates go up.
Variable Rate Loans
Consider paying off loans that go up with the prime rate. You may alternatively consider converting them into a fixed rate loan. Auto loans, personal loans, equipment loans, and mortgages carry variable rates. These variable rates can climb very quickly and end up costing the borrower more in interest.
As interest rates climb, the bond market tends to fall. As a result, many people who invest in bonds or bond funds are losing money. The bond market is generally expected to continue to fall as interest rates continue to increase, so those who have significant assets in bonds may want to consider rethinking their investment strategy.
Certificates of Deposit
Certificates of deposit (CD) will let savers lock in high rates or return for the trade off of not having access to their money for a certain period of time. The risk with certificates of deposit is that CD holders will still be stuck with low rate products if interest rates rise. Those who are purchasing certificates of deposit should be informed of the penalties for early withdrawals, just in case money needs to be withdrawn early.
Those who have savings in banks have had extremely low rates of return. This can make it hard to keep ahead of inflation while still keeping money in a safe and protected location. However, if interest rates rise, savers may be able to finally see a good payoff in their bank accounts.
Money Market Funds
Savers who put their money into money market funds, and invest in short term debt, should be able to see the rates on these accounts rise if interest rates go up. Just like the rates on savings accounts, money market funds have been low over the last few years, which has made it difficult for savers to earn returns that beat inflation.
Credit Card Debt
Even as mortgage rates have seen extreme lows, credit card rates have stayed quite high. Fortunately, rates for credit cards are not likely to climb much higher since they have never dropped. Currently, the average rate is around 17% for consumer credit cards. Paying off debt for credit cards is always a smart move, regardless of interest rates.
If interest rates continue to go up, it may be incredibly difficult for those with poor credit history to get good rates on mortgages, personal loans, and auto loans. It is always important to try to improve your credit report and maintain a good credit score with steady payments, but high interest rates make this an even more important financial move.
Now is the time to consider taking out a loan if you know that you will be needing one in the next few years. Taking out a loan now will help to lock you in at a low interest rate. It also may not be a bad idea to take out a line of credit that has a fixed rate to give yourself some flexibility in the future.
The Federal Reserve
Although the Federal Reserve has kept interest rates at a low level, monetary policies can change in the future. Savers, borrowers, and investors should be prepared to adjust their finances in accordance with this.
Watching for certain things as they relate to your finances will ensure that your money will continue to be protected even as interest rates continue to climb.
Harlene Truong is a content producer for Harley Finance – an Australian finance brokerage firm specializing in providing equipment, truck finance.