Rising Interest Rates

How to Prepare Your Finances for Rising Interest Rates

After years of near-historic lows, interest rates are on the rise. Here’s how this affects your personal finances and how to make the new economic climate work for you.


Credit cards

Credit cards’ interest rates are generally based on the prime rate, which is indirectly based on the federal funds rate set by the Federal Reserve. When the Fed increases the funds rate, you can expect the interest rate on your variable-rate credit cards to follow suit.

The good news is that rates tend to go up in small increments, letting you focus on paying down balances before there’s a dramatic difference. If simple belt-tightening doesn’t eliminate your debt, consider 0% credit card balance transfer promotions or refinancing to fixed-rate loans to lower your monthly payment.

It’s especially important to improve your credit when rates are rising. Having top scores qualifies you for the lowest available rates, which helps offset the increasing cost of borrowing. To boost scores:

  • Pay all bills on time.
  • Monitor credit reports and clear up errors promptly.
  • Try not to use more than 30% of your available credit at one time.
  • Carry a mixture of debt types, including auto or home loans and credit card balances.


Mortgages and loans

Like credit cards, interest rates on mortgages and other types of loans tend to creep up when the prime rate does, decreasing borrowing power across the board. Fixed-rate loans won’t be affected, but if you have a variable-rate loan, expect your monthly payment to increase periodically.

If you suspect you might need financing while rates are rising, apply for a fixed-rate loan sooner than later. If you’re in an adjustable-rate situation, consider refinancing to a fixed rate unless you plan to sell the asset or pay off the loan before the introductory, low-interest period ends.


Savings and investments

Savers do well when rates rise, since interest paid on these accounts increases in relation to the prime rate. To maximize gains, shop around for savings and investment accounts with the highest yields, and save regularly.

CDs remain popular because they’re federally insured, and their interest rates are often higher than those of regular savings accounts. In return, you must leave funds on deposit for a set period of time. Generally, the longer a CD’s maturity term, the higher its rate. When interest rates are rising, you might want to opt for a shorter term so you can take advantage as better deals become available. Live Oak Bank offers CD’s at attractive rates.

New bonds might pay higher interest than those issued in previous years, and bonds you already hold might actually decrease in price. If you sell older bonds early, you might take a loss. As long as you hold bonds to maturity, though, and the issuer doesn’t default, you’ll receive the full promised value.

Financial institutions like Live Oak Bank provide financial education and resources to help you navigate the changing economic landscape. Understanding the implications of financial trends can allow you to thrive, no matter which direction interest rates travel.

Roberta Pescow, NerdWallet

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