Lately a lot of different experts have been weighing in on the possibility of interest rates going up in 2014. While no one can predict the future, the growing chorus of voices making this particular prediction means it’s a possibility we should all be prepared for.
It can be tempting to dismiss interest rates as a minor detail and subsequently ignore them as you go about your daily life, but the fact is that even relatively small changes in interest rates can have a big impact on your finances – especially if you have debt!
Why Might Interest Rates Go Up?
Before we talk about how to protect yourself, let’s examine why interest rates might go up in the near future. At a national level, the Federal Reserve plays a major role in setting interest rates because it determines what rates to charge banks when they borrow money from the Federal Reserve itself. This in turn sets the rate at which banks borrow from each other – known as the Federal Funds Rate.
Based on the Federal Funds Rate, all other lenders set their rates, including mortgage lenders, banks, credit card companies, etc. Many in the financial industry have been preparing for interest rates to increase because the Federal Reserve has been keeping rates at a very low level since the global financial crisis of 2008. Now that the economy is showing signs of improvement, it’s likely the Federal Reserve will begin raising the rates.
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What You Should Do to Protect Yourself from Higher Interest Rates
So what does this mean for you? Well, it depends on what type of debt you have – if any – or if you plan to take on any new debt in the near future. Let’s take a look at a few of the main types of debt and see how higher interest rates may affect them:
Credit card debt: Most credit card interest rates are variable, meaning that if interest rates rise then your credit card’s APR will likely also increase. So what should you do? First, make a plan to get out of debt as fast as possible. Use the potential interest rate hike to give yourself added motivation! Another thing you should do is begin tracking your credit score and take steps to improve it. If you can ensure that your credit score is relatively high, then you may have the option later on of doing a 0% balance transfer. The 0% balance transfer is not always a good choice, but in the right circumstances it could give you a 12- to 24-month introductory period with no interest, and that could save you from paying higher interest rates.
Mortgages: If you have an Adjustable Rate Mortgage (ARM), then now is the time to start assessing your options. These types of mortgages can start out with low APRs that then rise significantly when interest rates nationwide begin to increase. If you have an ARM, you may want to think about refinancing right now, while interest rates are still at a low level compared to previous decades. If you can’t refinance, then be aware your rates may go up and start making plans to account for it. On the other hand, if you have been thinking about buying a home (and getting a mortgage), now may be the time to do it. Of course, you don’t want to rush into anything – that would be unwise. But if you feel that you can afford a mortgage and have done everything you need to do before buying a house, then it might be time to go forward with your plan before interest rates increase.
Student loan debt: Fortunately, many student loans are locked into a particular interest rate, meaning that they will not be affected in the case of rising interest rates on a national level. But some student loans are variable, which means now is a great time to check your own student loans and find out if your rates are fixed or not. If they’re not, you may want to start making plans for how to deal with higher interest rates.
Be Aware and Be Prepared
Ultimately, while we cannot predict what will happen with interest rates, we can inform ourselves of how any change will affect our own finances, and we can prepare for what might happen if interest rates were in fact to rise. An investment of a few minutes or hours of your time now can save you a lot of headaches (and money) in the future! If you have questions, feel free to ask us in the comments below, and if you want to do more research then check out our resource centers, where you can learn more about credit cards, student loans, mortgages, and other types of debt.
Image credit: mudretsov
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This post was published by Ben, Content Manager and Writer for » ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download