Interest Rates Rising?

The Federal Reserve Bank, which is a key influencer of interest rates, has signaled that rates may soon rise, in part to combat inflation. Here’s how higher rates might affect you — in ways good and bad.

For starters, higher rates mean you’ll pay more when you borrow money, such as for a mortgage or a car loan. Credit card interest rates will rise, too — and they’re already rather steep, with average rates charged by cards recently near 16% and many cards charging far more. It’s always smart to pay down debt — and it’s especially important now.

Note that even if mortgage interest rates double from where they are now — around 2% to 3% is typical — they will be far from historically high levels. Still, rising rates will mean higher mortgage payments for home buyers, and they may force buyers to settle for less costly homes as well. Borrowers with adjustable-rate mortgages (ARMs) will likely see their rates hiked over time. Some homeowners may want to consider refinancing their home loans now, to lock in current low rates.

Rising rates also mean that those who are saving money will enjoy more generous interest rates from their various bank accounts, certificates of deposit (CDs), money market accounts and bonds. The prices of existing bonds will likely take a hit because bond buyers will prefer to buy new bonds that carry higher interest rates.

Rising interest rates can put a damper on the stock market’s performance — in part because alternatives to stocks, such as bonds, will look more attractive as rates rise. Also, companies that borrow money by issuing bonds will have to pay more interest on those loans. (We’ve been in a very long period with ultralow interest rates, and the stock market has done very well for much of that time.)

When borrowing costs rise, that can slow overall economic growth, as businesses (and consumers) may spend less, depressing corporate earnings. Certain kinds of businesses, though, such as financial companies, will get a tailwind from rising interest rates.