What a change in interest rates means for you

When money is easy to borrow, people borrow lots of it – which can have unforeseen financial consequences. That's why knowing what to expect when interest rates change is vital.

What a change in interest rates means for you

Low interest rates mean cheap money. When it’s easy to borrow money, people tend to borrow too much. But when there’s a change in rates, everything from your mortgage to your investments can be affected, so it’s important to know what to expect.

The big rate picture

Interest rates will fluctuate based on the needs of the economy.

  • In down times, central banks tend to lower rates to try to stimulate the economy.
  • If the rates stay low for a long enough period, people sometimes think they will stay there indefinitely.

Those low rates eventually do change, and that usually impacts average people in four key ways:

1. Mortgages

Variable mortgage rates fall and rise with interest rates.

  • If you borrowed at the top of your budget, you should take a look at your finances to see where you’ll find some extra money if rates rise.
  • If you have a fixed-rate mortgage, you’ll have a bit more time to get your affairs in order, since the rates on those types of mortgages are related to long-term government bond yields and won’t see an immediate impact.

2. Credit

Credit cards aren’t impacted by an interest rate shift, because the interest rate on those is set by companies and based on the risk of people failing to make their payments, not the U.S. Federal Reserve’s Fed Funds Rate.

  • Lines of credit will change with interest rates, however, because these are tied to your bank’s prime interest rate.

3. Saving

When it comes to your savings, a change in rates could be good if you’re largely debt free.

  • Higher rates could give you a chance to reinvest in products with a higher return.
  • However, if you’re carrying a lot of debt, higher rates mean your payments on that debt will get more expensive – so you’d have less money to put into any kind of savings.

4. Investing

Rate changes will impact the markets, but it’s important to remember that financial markets tend to factor in expected changes.

  • If you hold stocks or bonds, the best thing to do when there’s a change is to avoid knee-jerk reactions and instead take a long-term view.

While rate changes tend to get a lot of media attention – and they certainly can impact your day-to-day expenses – these changes tend to happen gradually. Why?

  • A rate hike is never huge and not usually unexpected.

As such, people (and financial markets) will have to adjust to the new normal and make plans to deal with what’s to come.

Smart Tip provided by The Financial Pipeline. Founded in 1996 by a group of portfolio managers, The Financial Pipeline is dedicated to providing financial knowledge and education to anyone and everyone with even a passing interest in finance. Our motto, “Financial Information For the Rest of Us,” speaks for itself.

The material on this website is provided for entertainment, informational and educational purposes only and should never act as a substitute to the advice of an applicable professional. Use of this website is subject to our terms of use and privacy policy.
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