An interest rate hike can have a variety of impacts depending on the type of debt you hold, how you use it and whether you’re seeking out additional financing in the near future. It’s also important to understand how these changes can impact your financial health in general, especially as you consider retirement planning and estate planning.
Interest rates typically go up when the economy is growing and inflation is running high. The Federal Reserve raises the Fed Funds Rate to slow excessive spending and inflation by making it more expensive to borrow money. This can make it harder to get credit cards and loans, especially if you’re in the process of paying down your existing debt.
Savers and investors usually benefit from higher interest rates, as savings account and CD rates increase and deposits earn more money. However, mortgage and auto loan rates may rise, which can make buying a home or car more expensive. Credit card rates also increase, which can make it harder to pay off existing debt and may impact new borrowing.
Rising interest rates don’t have a direct impact on your credit scores, but they can affect factors that influence your score such as the total amount of outstanding debt you carry and your monthly payment requirements for loans and credit cards with adjustable rates. It’s important to recognize these potential impacts and take steps to plan for them. For example, it’s a good idea to avoid taking on additional debt when interest rates are rising, and to keep your credit utilization low (ideally less than 30% of your borrowing limit). This can help you manage the effects of higher rates.