3 Debts to Watch When Interest Rates Rise

Blog posted On June 12, 2018

The Federal Open Market Committee (FOMC) will meet today and tomorrow and Federal Reserve Chair Jerome Powell will host a press conference on Wednesday following the meeting.  Market analysts expect the Fed to raise the benchmark interest rate for the second time this year, and the seventh time since December 2015 when the Fed began more aggressively raising interest rates after several years of near-zero interest rates during economic recovery.  The Fed is expected to raise rates at least one more time this year and more economic growth is sustainable. 

As interest rates rise, the cost of borrowing money will increase proportionately.   Here are three debts to watch, when interest rates rise. 

Student Loans

Rising rates will impact both new college students taking out student loans and also graduates who have outstanding student debt with variable rates.  For incoming students, securing student loans with a fixed-rate is one way to protect their debt from interest rate fluctuations.  For those with existing student debt, it may be time to refinance loans from a variable interest rate to a fixed-rate. 

Credit Card Debt

Expect to see the annual percentage rate jump two or three percentage points this year.  Those who carry a balance will be most directly impacted by these rising interest rates.  If you currently have credit card debt, consider working out a payment plan to start paying it down.  Working with a financial advisor is one way to implement a debt management plan.

Mortgages

Homeowners with adjustable-rate mortgages have likely noticed their monthly mortgage payments have increased.  One way to lock low interest rates now is to refinance from an adjustable-rate to a fixed-rate mortgage.  An adjustable-rate mortgage will fluctuate based on the Federal benchmark interest rate.  A fixed-rate mortgage will stay the same throughout the life of the loan.  To determine what mortgage terms are best for your situation, it’s best to consult a mortgage professional.

Overall, interest rate increases are a sign of economic strength.  The Federal Reserve raises interest rates to moderate inflationary pressure.  The unemployment rate is at an 18-year low as the labor market nears full employment.  The Federal Reserve is transparent with its monetary policy moves, and interest rate increases were expected when the economy recovered following the Financial Crisis.  Interest rates are still historically low compared with rates ten to fifteen years ago.  

Sources: Bankrate.com, CNBC