Why Interest Rates Matter to You
Interest rates affect the decisions you make with money. Some of these are obvious – think about how much more money you would stick in your savings account if it paid 15% interest instead of 0.5%. How much less money would you put into stocks if you could get 15% in a simple bank account? On the flip side, you might take out a new credit card at 3%, but you probably wouldn't borrow at 30% unless you absolutely needed to.
Changing interest rates can affect consumers by increasing or decreasing their buying power for major life purchases, such as a home, a car and even a college education. As rates increase, you will be able to borrow less because more of your money will go toward interest charges. Rising interest rates can benefit you through higher rates on savings accounts and CDs.
When interest rates rise:
- Make sure you pay off credit cards balances in full each month
- If you have credit card debt, pay down the balance aggressively
- Finance fewer purchases and limit financing to things that make you money
- Improve your credit score to ensure you get the best interest rate on loans
- As far as savings, rising rates are a positive, shop for the best interest for your short-term savings and emergency funds
When interest rates fall:
- Lock in low interest fixed rate mortgages
- Look for low interest auto loans
- Refinance a mortgage or student loan to a lower interest rate
- It’s still not a good idea to increase your lifestyle spending through borrowing even when rates are low
- Interest rate cuts are meant to encourage consumer spending but can spur inflation; choose investments that give you a hedge against inflation, like equity investments and inflation protected securities
Interest rates matter to you throughout your life, accumulation phase and distribution/retirement phase. Paying attention to the interest rate environment and using the Best Practice suggestions here can put more money in your pocket.