By all indications, interest rates are headed back up. Every economic indicator, from employment reports to bond market performance, points in this direction. If you’ve been watching financial news shows, you’ve definitely heard this prediction. Yet to most observers, it’s somewhat abstract and far away. Sure, interest rates are going up; so what? And when?
You’ve no doubt heard that if you’re thinking about refinancing your home or buying a new one, now is the key time. That’s true, but that’s not the whole story. Here are three other financial decisions that can save you money in the long run if you make them soon.
1.) Consolidating your unsecured debt
If you’re carrying unsecured debt (credit cards, personal loans, or payday loans), you might find yourself paying a lot more soon. Don’t assume you are locked into your current rate. Most often, these kinds of debts use an adjustable interest rate. How much it costs to service your credit card debt is determined, among other factors, by the prime rate as set by the Federal Reserve. As the interest rates that the central bank charges other financial institutions rise, the rate your credit card provider charges you will probably also rise. (Note: Destinations Credit Union’s MasterCard is a fixed interest rate, meaning it will not go up automatically when rates rise.)
If you owe $7,000 on your credit cards (the American household average), a one percent change in the interest rate would mean an increase of $70 to your balance every month. That could mean an increase of as much as $15 on minimum monthly payments. That’s a tough hit, and it will also just make it harder to dig yourself out of debt trouble.
It’s best to pay off this debt as quickly as possible. If you have a large balance, though, consider a debt consolidation loan. These loans have fixed interest rates, so your debt won’t get more expensive in response to changes in the economy. Working with a representative from your Destinations Credit Union can keep this cost from consuming a bigger portion of your budget.
2.) Buying a new car
If you’ve been on the fence about upgrading your personal transportation or getting another vehicle for a new driver, the coming interest rate rise might be the final push you need. The rates that lenders can offer on car loans are influenced by the prime rate, too. An increase in the prime rate means car loans are going to get more expensive, thus decreasing your buying power.
For a $20,000 car, a one percent increase in interest rates means paying $10 more a month on a 5-year car loan. It means paying $400 more over the lifetime of the loan. That’s a direct decrease in the amount of car you can afford. Worse yet, dealerships may run promotions promising no interest financing for a portion of the loan. These promotions almost always revert to an adjustable rate based, in part, on the prime rate.
As a credit union member, you can get access to fixed rate auto loans that allow you to get the most car for your money. You can also plan with confidence knowing the portion of your budget devoted to paying your car note. You can even negotiate from a position of power knowing you’ve got financing squared away with a lender who’s got your back.
3.) Self-directed retirement planning
If you take personal care of your retirement funds, you need to prepare yourself for the market changes that will result from rising interest rates. These rates will most likely be coupled with a decrease in bond rates. This change will send brokerage investors running from long-term growth bonds into securities and commodities. This market shift will likely produce a great deal of short-term instability, as speculators try to time the shift in the market. The resulting market volatility can place your retirement savings at risk.
As the rates that lenders charge for loans go up, though, so does the rate they provide their investors. The interest rates you can earn on certificates and club savings accounts will go up in response to changes in the prime rate. Best of all, money you put into these accounts will be safe from the volatility of the market as changes occur in macroeconomic policy. When things have settled down, you can pull the money out of these accounts and put it into a more growth-oriented investment.
It’s easy to think of the decisions of the Federal Reserve as occurring in another separate world. The events of Washington, DC can seem far removed from your community. The truth is, in an increasingly interconnected world, timing your personal decisions to take advantage of changes in policy can save (or make) you money in the long term. This may not be enough motivation to buy a car you don’t need or consolidate a $100 credit card bill. But, if you’re making big financial decisions, you need to be smart about your timing and act fast. Stop by Destinations Credit Union’s office to see how we can help you before it’s too late!