Rock-bottom interest rates may soon become a thing of the past. How much do you really know about how rising rates could affect your bank account?
If you entered into adulthood after 2008, you probably became accustomed to thinking your cash savings are more likely to grow when safely tucked under your mattress than in most bank accounts, and that interest rates on auto loans and other loans are set in the single digits. But in December 2015, after seven years of fostering a low-interest environment intended to encourage consumer spending and investing, the Federal Reserve moved to increase rates by 0.25%. While the interest rate hike was certainly on the low end, it signals a shift for consumers — one that makes maintaining a high credit score even more of a priority going forward.
Carrying auto loans will be more expensive
While interest rates on auto loans didn’t see an immediate jump with the Federal Reserve’s announcement, future increases will eventually hit consumers in noticeable ways. With auto loans tied directly to the Fed’s benchmark rate, an interest rate increase will impact new loans (existing auto loans are fixed). In addition, with subsequent interest rate increases, the cost of vehicles themselves could rise as some dealers opt to decrease inventory in an attempt to skirt the cost of paying higher interest on the cars in their lots. Other dealers might stick to promotional offers and sales to incentivize sales, but these offers are reserved for those with good to excellent credit. (Shoot for 720 to land the best rates.)
Credit cards could see an interest rate creep
Your credit card company may have lured you in with the promise of a low interest rate, but there is something important you should understand about credit cards: Their rates are variable, not fixed. So an increase in rates could shift your overall financial picture in two notable ways — by increasing your monthly minimum payment and lengthening the amount of time it takes to pay off your debt.
However, maintaining a high credit score now might allow you to land a 0% introductory APR credit card offer and do a balance transfer before a change in the interest rate environment forces card providers to nix these offers. (Just make sure you read the fine print and fully understand the ramifications of not paying off your debt before the introductory rate expires.) Even the simple act of moving balances over to a low-interest card and aggressively paying down your debt now can have a big impact on how much you end up paying as well as your overall financial picture.
Variable-rate student loans will need to be locked down
While many existing federal student loans won’t be impacted by rising interest rates, new student loans, private student loans, and federal student loans under the Direct Loan program (taken out before 2006) will likely see a rate increase. Private student loan rates, for instance, are tied to LIBOR (London interbank offered rate), which is impacted when the Fed opts to raise interest rates. According to experts, these types of changes usually push consumers to refinance their loans into a fixed-rate loan to avoid future spikes. Again, refinancing with poor credit can not only be a challenge, but can also greatly impact the terms offered.
Is this the (temporary) end to rate hikes?
According to financial experts, you shouldn’t expect to see interest rates stagnate for another seven years. If economic growth continues, the Fed plans to increase rates by an average of 1% per year for the next three years. Nothing is set in stone, however, and they will continue to evaluate the impact on consumers and the economy. So while you might not feel the burn in your budget quite yet, now is the time to make sure you are staying consistent with your payments, keeping your credit utilization low, and continuing to pay down debt to ensure your credit score and overall financial health can help you land the best interest rates and loan terms in the future.