Interest rates have begun to rise, meaning both the cost of borrowing and the gains from saving and investing should be going up soon. In fact, some rates have already risen, driving speculation about what moves consumers should make to optimize their credit management.
Saving and Investing
For savers this means itâ€™s time to build up an emergency fund and keep it intact. Over the past few years interest rates from savings have been so low that savings were not out-earning the rate of inflation. For example, if your savings earn 2 percent and inflation is 3 percent, youâ€™re actually losing wealth by leaving money in the bank. Now that rates are beginning to go up thereâ€™s no excuse not to keep a savings fund in place. We advise building a fund that is equal to six to nine monthsâ€™ income. This is really the ideal time to get such a fund established since one will reap the gains of rising rates over time. (For some advice on how to find extra money in your budget for saving see our article on Saving money-the best opportunities to save.) The economy is expected to recover very slowly, however, so it wouldnâ€™t be wise to lock funds into something like a 5-year CD. A better move would be to stick with savings, or a money market account until rates rise, then look into CDs.
If youâ€™re a credit card user or in the market for another loan like a mortgage or auto loan, then rising rates will make the cost of those products go up. Now is the time to lock in a low rate on a mortgage or auto loan. Of course, like we said above, the recovery is expected to be slow, so thereâ€™s no need to rush out and jump into a large debt just to save Â½ a percent on a mortgage. Refinancing might be a good idea if you can lower your rate substantially, and you donâ€™t plan on moving any time soon. (Check out our Should I Refinance Calculator for help with the math.) As for credit cards, the best advice, as always, is to pay off balances in full every month. Anyone who carries a credit card balance will see an impact on the cost of borrowing, and itâ€™s likely to go in only one directionâ€”up.Â
Melinda Opperman is Senior Vice President of Community Outreach & Industry Relations, Springboard Nonprofit Consumer Credit Management, Inc; and Executive Director, Springboard Education Foundation. Springboard Nonprofit Consumer Credit Management is a member of the National Foundation for Credit Counseling. To schedule an appointment with a certified financial counselor call 800.431.8157, or visit Springboardâ€™s website at www.credit.org.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.