The Good and Bad of Rising Interest Rates

Have you looked at the interest rate on your savings account lately? The joke is that you now pay your bank to keep your money! I can remember not so long ago getting a 5.25% interest rate on my cash.

Since that day we have seen interest rates tumble to close to zero but now we may start seeing interest rates start moving up again. Have you thought about both the good and bad that may be a result of rising rates?

The Good:

1. You may start to see your cash earning an interest rate again. If interest rates start to rise, banks may start paying you more to hold your cash and that idle money may start working for you again. CDs may become another option since banks may be more willing to pay you to lock up your money.
2. Bond interest rates may start to rise. If you are a bond holder, you most likely are receiving income in the form of dividend payments. Most bonds have a stated interest rate and as rates move up new bonds generally will have higher dividend payments. As your existing bonds mature, you may have the ability to buy new bonds and your income could go up if the new rates are higher.
3. It may become easier to obtain a loan. When interest rates are low it becomes more difficult for banks to earn money when they make loans. Consequently, it can get harder to get a loan while rates are down as banks get pickier about the borrower. As rates go up, banks may find it easier to make money and thus you might find it easier to get a loan.

The Bad:

1. Your debt may cost you more. If you have credit card debt or loans with variable rates, you could find that the cost of your prior expenditures will go up. If your monthly payment stays the same while your interest rates go up, it will take you longer to pay off the debt.
2. Higher loan interest rates could slow the economy. When interest rates are low businesses tend to expand more using the “cheap” money found through low interest rates. When rates go up, businesses tend to slow their borrowing which could slow down the economy.
3. Things may cost more. Although not directly related, rising rates could lead to increased inflation. If we do see inflation, the prices that you pay for things like groceries and gas could go up.
4. The stock market may not like higher rates. The stock market moves up and down based on the profitability of companies…among other things. If interest rates rise, company growth could slow and this could lead to declining stock prices.

For most of us, we will see some good and some bad from higher interest rates. We don’t know exactly how high they will go or how fast they will increase, but in all likelihood, we will see rates rise in the future. Are you prepared?