Interest rates are rising and consumers may wonder how this affects their finances or credit. Interest rates affect the lives of millions of Americans with home mortgages, car loans, and educational endeavors. The vast majority of consumers in the United States borrow money to obtain the high-cost things they need, such as a home and a car when unable to pay for these things with cash.
It is crucial to understand what happens when interest rates rise. One of the more immediate and significant effects of rising interest rates is that it results in more expensive loans for banks who are borrowing from the Federal Reserve. However, the process doesn’t stop at increased costs for banks.
A rise in interest rates almost always results in banking institutions increasing the rates associated with loans and credit cards. Because the bank is paying more to borrow money, they pass this increase on to the consumer.
However, consumers – especially those with subpar credit – are impacted by high-cost loans when interest fees go up. For individuals with variable interest rate loans, interest rates can significantly increase. The increase in interest rates for those who have variable rate loans will see their expendable cash become reduced from having to pay higher costs on loans.
Credit card companies also tend to increase their interest rates as the Federal Reserve raises them, which is bad news for consumers who have high interest rate credit cards or for those who carry balances month to month. This can increase their monthly minimum payments and make it more difficult to pay down debt.
More Interest, Less Money
With considerably less disposable income, an individual’s life may be impacted as they have less money to live on. While a rise in interest rates increases costs for banks and consumers, it becomes substantially easier to borrow money from banks compared to times where interest rates were lower.
Banks will often loosen their previously stringent underwriting protocols to bolster the volume of loans they approve. The feasibility of borrowing money during high-interest times can be a boon for those with poor credit; however, the amount of available cash is lower for most consumers who have to pay higher interest rates.
Impact of Interest Rates on Credit
Interest rates do not have a direct impact on credit, but there are some things to note. For cardholders who carry a balance month to month, higher interest rates can mean a higher utilization ratio. This is significant because your credit utilization makes up 30% of your credit score. Your utilization ratio is how much credit you have available to you versus how much you use. FICO suggests keeping this ratio under 30%. If interest rates increase, your balances become higher, and so does your utilization ratio, which may lower your credit score.
Higher and Higher for 2018
In March 2018, the Federal Reserve voted to increase interest rates to 1.75% – the highest rate level since 2008. Nearly every American will be impacted by this decision. By merely just having a credit card, individuals are affected as rising interest rates essentially equates to credit card debt becoming more expensive.
Monthly payments can increase exorbitantly in times of increased interest rates. What further exacerbates the issue is the fact that credit card interest rates almost immediately rise after the Federal Reserve raises them.
The one thing that can help consumers however is the CARD Act of 2009. Credit card companies can’t just raise interest rates for consumers as soon as the Federal Reserve raises them. Consumers must be notified 45 days prior to interest rates increasing that their rates will go up. This gives consumers time to change credit cards, or close the account if they don’t want to pay more in interest – although they will have to make payments on any remaining balances.
Credit card percentage rates continue to rise along with the Federal Reserve rates. Current Federal Reserve Board Chairman, Jerome Powell, stated that the Federal Reserve would raise interest rates at least twice more in 2019.
For those consumers paying attention to the financial market, the rise in increase rates won’t come as a surprise. However, for millions of others, the sudden increase in interest rates can be shocking as their finances drastically chang after the new rates go into effect.
Essential Information About Interest Rates
- As a general rule, you can anticipate changes in your finances by the following example: “When the Fed has increased rates by 0.25%, you can expect your credit card interest rate to increase by 0.25%.”
- Businesses are enormously impacted by increased interest rates. In the wake of increased interest rates, businesses will often forgo a loan, thus curtailing growth and advancement, and inevitably impacting the local economy.
- Millions of businesses choosing to forgo high-rate loans can have dire effects on the economy
- When the Federal Reserve decides to raise interest rates for banks, it inevitably means that the cost of borrowing increases for millions of consumers
Conclusion
As the Federal Reserve continues to raise interest rates, it can have a profound effect on consumers – especially those applying for new credit. Not only that, but it can impact consumers’ finances, leading to less available cash. Additionally, a low credit score leads to higher interest rates. If you have good or excellent credit, higher interest rates still impact you, but you’ll still likely qualify for the lowest interest rates available. If you want to qualify for lower interest rates, but are in need of credit repair, consider Lexington Law Firm. With over a decade of experience, we have helped millions of clients remove items that are inaccurate, unfair, and unverifiable.
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