The long wait may finally be over; interest rates have recently been on the rise. The 10-year treasury yield edged up after the November 2016 election, and in mid-December the Federal Reserve hiked the fed funds rate a quarter point, and projected three similar hikes in 2017.
Many millennials who are getting started in the workforce have never encountered an interest rate hiking cycle. Here's what you need to know about how higher interest rates could impact your saving and borrowing.
The quick take is that interest rates that you earn on your savings accounts may finally begin to edge up—albeit slowly—but on the flip side, rates that you are charged on your loans and credit cards will also increase. It's best to prepare now and plan accordingly.
Savers and Borrowers Will Be Affected by Higher Rates
Millennials who have big spending or borrowing plans on the horizon may be considering moving up the timeline of their purchases if possible. "Buying homes and making large purchases via borrowing could be impacted" in a rising interest rate environment, says Katharine Perry, financial consultant at Fort Pitt Capital Group.
"If you’re looking to make a big purchase using credit, you may want to do that sooner rather than later. If rates are going to increase in the months to come, you might want to capture a lower interest rate now."
Know Your Loan Rate
Credit cards and auto loan rates may be likely to go up. It’s important to know your credit card interest rate. Variable credit card interest rates are running about 16.28%, according to Bankrate.com. Ideally, you are already paying your credit card bill in full each month, but if that isn't feasible right now, consider moving to a credit card with no balance transfer fee. Typically these allow consumers to shift debt from a higher-interest credit card to a lower-interest credit card.
When borrowing for a mortgage, car loan, or credit card, it all boils down to your monthly payment. "You typically want a lower monthly payment, so the lower the rate, the lower the monthly payment. Higher rates would make your monthly payment higher. Any large purchases on credit, like a mortgage, you might want to consider before rates rise—but only if you’re ready to make that purchase," Perry says.
Tips for Savers
Although millennials are juggling multiple financial obligations including student debt, many financial professionals claim it’s always important to "pay yourself first" and try to build up an emergency savings account that covers up to six months’ worth of living expenses. With the possibility of an interest rate hiking cycle ahead, you might even start to see some return on your savings.
"If interest rates go up, millennials may actually get a better rate on savings accounts. You may actually make money. For millennials who just started saving, it may have a positive impact," Perry says.
There are different kinds of savings accounts, and it pays to shop around for the best rate. One example is a certificate of deposit (CD). This is a savings certificate that allows savers to lock in a set interest rate for a specific time period.
These interest rates are expected to rise as the Federal Reserve hikes interest rates. Think carefully about how long you want to tie your money up. CDs are offered in a wide range of time periods, from three months to five or more years. Typically, the longer the time period, the higher the interest rate, but as interest rates may be rising in 2017, savers may want to consider locking up money for shorter periods right now.
Focus On What You Can Control
Although balancing your checking account and paying your bills on time may not be the most exciting way to spend your Saturday afternoon, it can pay off with a higher credit score. Take the time to manage your financial health, just as you carve out time at the gym.
Your credit score is a big thing to focus on, Perry says. "If you’re getting a mortgage and you have terrible credit, your rate will be higher anyway. Same goes for credit cards. The higher your credit score, the lower your rates. So keeping your credit score in check is a good idea anytime. Focus on the piece of the puzzle that you can control. You can’t control the federal funds rate, but you can control your credit score, which will impact your individual rate on borrowed money," Perry concludes.
Higher interest rates may be part of the new financial and economic cycle that could dominate in 2017. Some careful planning now could leave you poised to take advantage of the rise in rates.
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