If there is one thing that you need to monitor, it is the interest rate hike. This is the rate that the Federal Reserve, or the Feds, will dictate. When they say that the interest rate will increase or decrease, you can expect that changes will happen in the financial industry.
If they say that the rate will decrease, that is actually good news. You can negotiate with your creditors to maybe give you a lower rate on your loan or credit card accounts. If you have the ideal credit report, they may relent and reward you because of good credit behavior.
When the Feds decide to increase the interest rate, that is when you need to start paying more attention to what will happen.
Recently, the Feds announced that they will raise the interest rate. This is the third time that they increased the rate this year where it goes from 1.25% to 1.50%. What exactly will this do to you?
One thing is for sure, the increase will prompt banks and other financial institutions to change their own interest rates. Once they do that, it will affect your existing debts. It can increase your balance significantly. If you want to avoid debt problems or any negative financial issue, it is very important that you monitor the interest rate hike that the Federal Reserve.
How the Fed’s rising interest rate will affect you
You may be wondering, how will the Federal Reserve’s interest rate hike affect your own personal finances? There are a couple of things that will be affected and you need to start monitoring this particular figure.
Credit card rates will rise
Did you know that credit card companies are allowed to raise their interest rates without reason? It is not illegal to do so as long as they inform you before they change the rate. Of course, it has to be within the limitations set by the Federal Reserve. So if the Feds decide to increase the interest rate, you can expect that creditors will try to take advantage of this to gain extra profit. While they are free to raise the rates, you need to know that you have every right to refuse the rate. There are a couple of things that can happen. One is they will agree to retain your old rate. Another scenario is they will insist on the new rate and will expect you to accept it. The final scenario is you closing the credit card account and paying off your balance. Either way, you need to know that creditors can change the interest rate on your card if the Fed announces an interest rate hike. Then again, if you have a habit of paying your balance in full at the end of the month, this increase will not really affect you.
Loans will be more expensive
When there is an increase in the interest rate, old loans are usually exempt from being affected. However, if you have plans of applying for a new loan, you might end up with a higher interest rate. The same is true for credit card accounts. At this point, you want to tread carefully when you are planning on borrowing money. According to studies done by the Fed, Americans have a hard time with certain debts, like car loans. Imagine how harder it will be once the interest becomes higher.
Mortgage payments will rise
If you have a fixed-rate on your mortgage, the interest rate hike will not affect you. However, if you have an adjustable-rate mortgage (ARM), that will be affected by the changes that will be implemented by the Federal Reserve. People usually opt for an ARM because it is typically lower than a fixed rate mortgage. But the risk comes when the Fed decides to change the rate. So expect that your monthly amortization will change in accordance with the rate that the Fed will set.
Investment returns will increase
If you invested in savings, money markets or even CDs (Certificates of deposit), you can expect your profit to rise. One of the best practices when it comes to investing is to monitor the interest rate so you will know the financial risk of your current investments. It will help you identify if you need to move your money or keep them where they are.
As you can see, most of the effect of an interest rate hike will be on your debts. However, if you have investments, it will also have a positive effect.
What to do when the interest rate increases?
Now that you understand how the Federal Reserve’s interest rate decisions will affect your finances, what should you do to counter its effects?
As mentioned, most of the effect of a rising interest rate will be on your debt. According to the data from the Fed, the total household debt is currently $12.7 trillion. A huge portion of this debt will be affected by the increasing interest rate. If you have identified certain debts that will be affected, you might have to make sure that you will do something about it. Otherwise, your debt payments might end up overwhelming your finances.
Fortunately for you, there are a couple of things that you can do to keep the negative effect of an interest rate hike minimal.
Try to negotiate your interest rates
First of all, you need to try to negotiate your interest rates first. Most people are probably not aware of this. Either that or they are too intimidated by their creditors to even consider the idea of negotiating their credit accounts. But the reality is that you have every right to negotiate the interest rate on your card. If you have been good at using and paying your credit card balance, they might relent. And if you have been with the bank for a long time, it might also work in your favor. You will never know unless you try. This might be a chance to lower your credit card interest rate.
Get rid of the high-interest debts
In case negotiating does not work, you need to focus your attention on your high-interest debts. At least, if these will be affected by the interest rate hike. These debts will probably be credit cards. These are notorious for having the highest interest rate among the different types of debt that you can owe. While you need to maintain the minimum payments for all your other debts, you need to try to make bigger payments for those with the highest rates.
Have a plan to pay off your debts as fast as you can
Paying off your debts will keep you from worrying about the interest rate hike. So come up with a plan to pay off all your credit accounts – whether they will be affected by the hike or not. There are so many debt relief options that you can choose from. Among your options include credit counseling, debt management, debt consolidation, debt settlement, and even bankruptcy. Choose the right debt solution by considering your financial and debt situation. There is no one formula to get out of debt. But you need to choose the right program to make sure that it will be effective in dealing with your debt situation.
Stop accumulating more debt
Finally, if the Fed is serious about the interest rate hike and it seems like it will be happening again in the future, you might want to keep yourself from borrowing money. At the very least, put it off until you have paid your current balance. Besides, with the higher rates, it is not really a good time to apply for a loan. It will cost you more in the long run. So wait until the rates have gone down before you start planning on getting a new loan.