Interest rates may begin to rise for the first time in a while, which may be the first time some younger borrowers and savers have seen a hike in rates.
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.
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."
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.
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.
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.
Essential Portfolios uses advanced technology in an interactive user experience to help you pursue your financial goals.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
*Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin is not available in all account types. Margin trading privileges subject to TD Ameritrade review and approval. Carefully review Margin Handbook and Margin Disclosure Document for more details. Please see our website or contact TD Ameritrade at 800-669-3900 for copies.
TD Ameritrade and Fort Pitt Capital Group are separate and unaffiliated, and not responsible for one another's policies or services.
Investors wishing to sell CDs prior to maturity will be subject to market risk (investment may be worth more or less than original cost) and limited liquidity in the secondary market. FDIC insurance does not cover loss of principal you may incur when a CD is sold prior to maturity.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.