The News might have you worried about increasing Interest Rates, but it can be difficult to know exactly how it might impact you. At Financial Resource Helper, we’ve taken the time to do the research needed to make the explanation as simple as possible. So if you’re interested in learning more about rising Interest Rates, and how that could impact your debt read below::
Understanding Interest Rates
Interest Rates are something you’ve likely heard of before. If you’ve taken student loans, opened a credit card, or taken out a home loan then you’ve been introduced to Interest Rates. Put simply, your interest rate is the percentage of your loan that you have to pay every year in order to keep the loan in good standing.
The Federal Funds Rate, which is being discussed throughout the news lately, is the interest rate that the Federal Open Market Committee (FOMC) sets and effectively serves as the rate at which banks are able to borrow money. As this rate increases, it becomes more expensive for banks to loan money. This causes your interest rates to rise if they’re variable, like on credit cards, or leads to new loans having higher rates – like home loans, which have had their rates almost double in some areas this year.
The FOMC meets to update these rates 8 times a year, and are currently increasing rates in an attempt to combat inflation. You can look into one of our other posts, What’s Causing Inflation.
Credit Cards
The majority of Credit Cards use variable interest rates, which they refer to as their annual percentage yield (APR). With increasing interest rates, it is very likely that you will start to see your APR increase. This can lead to higher minimum payments, as well as making it substantially more expensive to hold a large balance on your credit card.
Even a small shift in your APR can cause large impacts on how long it might take to pay off your loan. Your credit card servicer can provide you with any information regarding your specific rate, but it’s important to be wary and pay more of your minimum if possible.
Mortgage Payments
If your mortgage has a fixed interest rate, meaning that it was determined at the time of your purchase and will not change unless you refinance, you shouldn’t see any major changes in your payment because of rising interest rates. Because rates are higher, it is usually not advisable to refinance as it could lead to higher payments.
If you have an Adjustable Rate Mortgage, referred to as an ARM, whether you see increased payments will depend on the terms of your loan agreement. If your rate is set to update soon, or moves with the Federal Funds Rate, then it is likely you could see an increase in your payment.
Savings
Although not related to your debt directly, one positive things about increasing interest rates is that many banks are offering increased yields for anything from your savings account to money market accounts, CDs, and more. With some banks increasing their rates by as much as 1%, this can help offset some of the costs that come with your other payments possibly increasing.
