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When interest rates are on the rise, it's important to avoid certain actions where your money is concerned. Remember, higher interest rates can make the consequences of certain financial moves more serious. Below you will discover five mistakes that you should avoid when interest rates increase. These tips will teach you how you can make an environment of higher interest rates work to your advantage instead of allowing those circumstances to cost you extra money.
1. Overspending
Most credit cards feature variable interest rates. So, when the Federal Reserve raises the federal funds rate, the interest rates on credit cards often follow suit. If you're carrying a balance on your credit cards when the interest rate on your account goes up, that debt suddenly becomes more expensive. And because credit card interest rates tend to be notoriously high, any balances you are unable to pay off by the due date can quickly grow into a bigger problem. Revolving outstanding credit card debt can also increase your credit utilization rate and might hurt your credit score in return.
What You Should Know
When it comes to credit card management, overspending is the root of a lot of problems. Spending more on a credit card account than you can afford to pay off in a given month leads to debt. If you can update your budget each month and not overspend, you may be able to improve your situation. From there, you can create a plan to free up extra cash (either by cutting expenses, increasing income, or both) and apply it toward paying down any debt you already have. Once you pay off your credit cards to zero and keep them there, you should be able to enjoy the many perks that credit cards offer (i.e., credit card rewards, fraud protection, etc.) without the added cost of interest.
How Climbing Interest Rates Affects Your Credit Card
2. Not Looking for Lower Interest Rates
Rising interest rates on revolving credit cards can be expensive. An increase in interest rates could also slow down your debt elimination goals. Yet you shouldn't assume that you're stuck just because the annual percentage rate (APR) on your credit card accounts starts to trend upward. With a little effort, you may be able to find lower interest rates that could help you save money and get out of debt sooner.
What You Should Know
There are several debt consolidation options you can consider if you're looking for a way to pay a lower interest rate on your debt, including:
- Balance Transfer Credit Cards
- Debt Consolidation Loans
- Home Equity Loans or Lines of Credit
With credit card balance transfers, in particular, you might be able to find a 0% APR introductory offer. Then, if you can create or free up some extra funds, you could use them to get out of debt faster and avoid the extra expenses that rising credit card interest rates can inflict upon your wallet.
As an added bonus, consolidating your debt has the potential to help you improve your credit score, even before you bring your account balances all the way down to zero. A higher credit score can work in your favor over and over again—whether you're searching for an attractive rewards credit card or trying to buy a new home.
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3. Being Afraid To Move Your Money
A higher federal reserve rate doesn't mean the outcome will be all bad where your finances are concerned. Yes, borrowing money can become more expensive in this scenario. But when interest rates on debt go up nationwide, the money you earn on savings might increase as well.
What You Should Know
When the Fed rate rises, many banks may opt to increase the annual percentage yield (APY) they offer on savings accounts. So, you may want to shop around to make sure your bank is offering an APY that's competitive with the best high-yield savings accounts available.
If you find that your bank isn't giving you an APY that's in line with the interest rates other financial institutions are willing to offer, it might be time to consider taking your business elsewhere. When you keep your savings in an account that offers you a minimal return, you could be leaving potential earnings on the table.
4 Ways to Earn More Interest On Your Savings
4. Failing To Ask for a Rate Match
It's important to advocate for yourself where variable interest rates are concerned. Just because your credit card issuer is charging you a certain APR or your bank is offering you a certain APY on your savings account balance doesn't mean that's the best deal that's out there.
What You Should Know
If you discover a competing lender or financial institution with a more attractive interest rate, you may be able to negotiate a better arrangement for yourself. For example, you can call up your credit card issuer, mention that you've found a lower APR elsewhere, and ask if it's willing to match or beat that rate. The same can be done where your bank is concerned—although you'd be asking for a higher APY to increase the earnings on your savings account balance.
The worst thing that can happen is that your bank or credit card issuer may turn down your request. But if that happens, you can always consider opening another account to take advantage of a better offer.
5. Ignoring Your Credit
Having good credit matters all the time, especially when interest rates rise. Good credit can help you in many different ways, whether you want to fill out a new application for credit or you hope to save money on car insurance.
What You Should Know
Ignoring your credit can be a big mistake. Thankfully, it's simple and free to keep tabs on your credit reports from Equifax, TransUnion, and Experian. Visit AnnualCreditReport.com to claim your free credit reports from each credit bureau once every 12 months. Many credit card issuers also provide cardholders with free monthly access to their credit score—another opportunity to keep tabs on the health of your credit.
How to Improve Your Credit Score Fast for Free
The five tips above can help you keep your finances in good shape. And when interest rates are on the rise, protecting your finances is a task that deserves even more of your attention than usual.
Michelle Lambright Black
Michelle Black is founder of CreditWriter.com and HerCreditMatters.com. Michelle is a leading credit card journalist with over a decade and a half of experience in the financial industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, small business, and debt eradication. Michelle is also a certified credit expert witness and personal finance writer.
