Interest rates are on the rise. We’ve been in an environment of rising rates since 2004 and all indicators are that the Federal Reserve is ready to boost them again. The current environment of rising rates can play havoc with the average family’s budget. Here are some suggestions for keeping the impact to a minimum:
1. Take stock of any debt you have that has a variable interest rate. A variable interest rate is any rate that isn’t fixed, and therefore fluctuates over time. Examples include variable rate mortgages, home equity lines of credit, and credit cards. The interest rates for these kinds of debt are often tied to banks’ prime rates of lending and when the Federal Reserve raises rates, banks follow suit by raising prime.
2. Determine if it makes sense to convert those variable rate debts to fixed rate loans. Mortgages can be refinanced, home equity lines of credit can be replaced with home equity fixed rate loans. And while credit cards cannot be converted to fixed rates, often times the rate can be lowered – sometimes even to 0% – to give you time to pay them off. (See Using 0% Balance Offers to Pay Down Debt.)
3. Become determined to pay off variable rate debts early. Use those rising rates as extra motivation to pay off credit cards and lines of credit. While paying off debt early is almost always a good idea, it’s especially important in times of rising rates when having variable rate debts makes you extra vulnerable.
4. As you begin to convert loans and pay off debts, shift some of those interest savings into savings account deposits. This is particularly important if you don’t have an adequate emergency savings fund. As you begin to begin to build those balances, you’ll find those rising rates working for you instead of against you! (See Cashing in with Online Savings Accounts for more info.)