Low interest rates have been a blessing to many of us for a long time now. They've permitted us to buy homes with rock-bottom mortgages, refinance our mortgages at lower rates, and secure less-expensive car loans. Some enterprising people have taken on extra risk and used low-rate home-equity loans to fill their portfolios with the likes of Medtronic
But interest rates finally appear to be on the rise. Last week, Alan Greenspan and Co. at the Federal Reserve hiked the Fed funds rate from 1% to 1.25%.
This is meaningful for those of us who have borrowed money at rates that fluctuate. If you have an adjustable-rate mortgage, for example, you will likely be staring at a rate increase one of these months. And it may be the first of many. (Learn more about adjustable-rate mortgages.)
If you're saddled with credit card debt, your situation may be more troublesome -- that's because this kind of debt generally sports fairly steep interest rates, even when overall rates are low. When the Fed funds rate rises, credit card rates will likely surge even higher. Would you believe that some credit cards sport interest rates in the mid-20% range? Tim Beyers' eye-opening article on his $45,000 mistake may shock you, but at least it has a happy ending.
So what should you do now? Here are some ideas:
- Expect more rate increases from the Fed, but gradual ones. The Fed funds rate is likely to be significantly higher in a few years, but it won't happen overnight. (Indeed, if the economy or political events warrant it, rates may even head south again.)
- Expect to see some bonds fare better, at the expense of stocks, as rising rates will make bonds look more attractive. (However, carefully selected stocks and even index funds will generally outperform bonds over long periods.) Since interest rates are expected to keep rising for a while, long-term bonds might not be your best bet yet.
- Prepare to start getting more money from your bank as it begins paying out more to you in interest. Borrowers like low rates, but savers should welcome higher ones. Our Savings Center can help you maximize your short-term money via CDs and other means.
- If refinancing makes sense for you, don't put it off any longer. Learn more about it in our Home Center.
- If you're worrying because you planned to buy a house in a year or two, take comfort that home prices may well level off or even drop a bit in the face of rising rates.
- If you think you'll be soon paying more on your adjustable mortgage (or any other loan with a variable rate), begin making sure you can handle it. If necessary, sock some money away in preparation.
- Get your credit card debt under control. Our Credit Center can help. Learn what rates you're paying and devise a plan, like Tim Beyers did, to dig out.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.