Most people have at least one product in their financial portfolio that carries an interest rate — like a credit card, student loan or home mortgage. For those people, what happens to interest rates and how it affects their bottom line is of great importance. The Federal Reserve (the Fed) sometimes raises interest rates and may sometimes do so multiple times a year. While a rise in interest rates actually means the economy is in good shape, it’s not necessarily the best news for those with loans or other outstanding debts. For example, people with variable-rate student loans may have already seen their interest rates go up and could potentially see immediate benefits by refinancing their student loans.
Before deciding on the best moves for your own assets and debts in this particular economy, it helps to learn a little bit more about how interest rates work, as well as what your options are moving forward.
Why do interest rates rise?
Although rising interest rates might seem like an all-around negative thing, it’s actually a sign that the economy is generally doing well. Here’s how it works:
- A precursor to the Fed raising interest rates is that people have started spending more and are infusing more cash into the economy. Usually, companies have been hiring and investing more, too. This means you may have been able to find a job more easily in recent months, or perhaps you got a raise.
- When more cash is infused into the economy, overall prices start to slowly rise, and inflation creeps up as well.
- In order to keep things in balance in this type of environment, the government tends to raise interest rates.
How rising interest rates might affect you
Rising interest rates will affect any type of borrowing with variable interest rates. The good news in this type of environment is that savers could see a little bit of interest accrual in their savings accounts, but you’ll likely need to do some shopping around for the best offers (more on that below). In that case, if you have money you don't need right away, putting it in a savings account could yield higher dividends than it has previously.
That’s the positive. On the negative side, people with variable interest rates on loans — like student loans, mortgages, etc. — will see a direct rise in interest rates. Credit card interest rates are likely to rise as well. When it comes to student loans, the type of loan you have will directly affect whether or not — and when — you’ll see a rate hike. For example, federal student loan rates are fixed, so borrowers with that type of loan aren’t likely to see an immediate change. Private loans, however, can have either fixed or variable rates. In other words, if your student loan interest rate is variable, you’ll probably see a rate hike if you haven't already.
What you can do about rising interest rates
In a rising rate environment, it's important to be proactive. Take a look at your loans across the board, as well as what your current interest rates are, to see if there are ways to lower them. It’s a good idea to do your research and make a switch sooner rather than later, before rates potentially rise again in the near future. Here are three things to do before interest rates rise:
- Look for better deals on your credit card: Balance transfers to cards with lower or zero interest rates — even for a set period of time — are a solid option. You can transfer your high-interest balance over to these lower-interest cards and pay off the debt within the given timeframe to keep your interest payments to a minimum.
- Look into student loan refinancing: Your first step is to check if your interest rate is variable or fixed, and whether or not your rate has gone up. If it’s fixed and/or hasn’t gone up yet, it’s still a good idea to educate yourself on and shop around for student loan refinancing. There can be a variety of benefits to refinancing your student loans, including lower rates and shorter repayment terms. Borrowers should know they lose some of the special benefits of their student loans, like forbearance and income-based repayment, when they refinance.
- Look for a fixed-rate mortgage: If you’re in the market for a 30-year mortgage in a rising rate environment, it generally makes more sense to find products that offer fixed rates. This is actually true of all products in this type of environment, not just mortgages.
Rising interest rates might seem scary, but there’s plenty you can do to take the reins. You can make the most of the current economic climate by socking away as much savings as possible to make money off rising interest rates, and do some research to see if refinancing your current loans can save you money in the long run. Use this student loan refinance calculator to get a custom estimate in under a minute.