Debt may become an even bigger pain to pay off soon. Here’s why—and what to do about it.
When the Federal Reserve (a.k.a. the “Fed”) raises rates that banks use to lend money to each other, it affects what lenders charge us for things like loans and credit cards.
In December, the Fed raised those rates from .25-.50 percent to .50 to .75 percent. And they’re probably not done.
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Would you believe us if we said this is actually a sign of a strong economy? Those near-zero rates we’ve enjoyed for years are how the Fed stimulates growth. (Lower rates make it cheaper to borrow money, which we then spend, giving the economy a boost.)
Now that the economy is stronger, the Fed can increase rates. Still, even if it does raise rates by .25 percent three more times in 2017, as it’s hinted at, the net increase would be just one percent.
So, are rising rates a good thing?
Depends on what we’re doing with our money.
If we’re taking out a new loan, like a mortgage, or currently have a variable-rate loan or credit card, higher rates mean we can expect to pay more.
But this could be good news for savers and investors. Higher interest rates mean we’ll earn more on our savings and some other investments, says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. “Bonds, for instance, pay income, so as rates rise, the income they pay will rise.”
What should we do?
Panic! Just kidding. Don’t worry. We’re unlikely to feel a pinch anytime soon. Rates are still near historically low levels.
But here’s how to make the most of the situation.
- Consider locking in low rates while you can. “Consumers who are considering refinancing or purchasing a home might be wise to do so now to obtain a rate-lock,” says Kathleen Lindquist, a San Diego financial advisor. (But don’t force it. If you’re not ready, keep building great credit, and you’ll still be able to get good terms down the road.)
- Prioritize paying down debt with variable interest. This is the time to pay down any existing debt with variable interest rates. It’s going to get more expensive as interest rates rise. If you owe a lot and have great credit, you may consider a low-interest balance-transfer offer, or a personal loan through online lenders like Earnest or SoFi, which can save you on interest. Just be sure to pay off the balance before any low-interest offer expires if you opt for a transfer.
- Save strategically. Move savings to a higher yield account as rates rise. (The highest yield accounts are currently paying 1-1.1 percent.) Other low-risk investments like CDs may start offering better rates, too.
- Keep investing. Stocks fell briefly after the news, but the market quickly recovered and has risen since. As usual, the best plan is not to make any snap decisions, but to stay the course and keep long-term goals and strategy in mind.