Interest rates have been at historic lows since 2008 when the recession began. Now, with a stronger economy, the Fed is raising rates to manage inflation. By raising rates, the Fed is signaling that the economy has recovered and is back on track for future growth.
The impact on you
Rising rates have a direct impact on consumers because the interest rates on many credit products — like credit cards and lines of credit — are tied to the Prime Rate. For example, if you have a credit card with an annual percentage rate (APR) of 13.75%, that APR is made up of two rates: the Prime Rate, plus the interest rate charged by the lender. So when the Fed raises the Federal Funds Rate, the Prime Rate increases — and so does the annual percentage rate (APR) on consumer credit accounts.
Fixed-rate vs. variable-rate credit
In a rising rate environment, it’s important to understand the differences in how fixed-rate and variable-rate credit products work, so you can manage the impact on your finances.
Fixed-Rate Credit Products
Fixed-rate credit products like personal loans and car loans are not impacted as rates rise because they have:
- A fixed rate that is locked in and stays the same whether interest rates go up or down
- A fixed monthly payment that stays the same for the life of the loan
- A fixed term, so you know exactly when the loan will be paid off
Keep in mind:
When rates are rising, locking in a fixed rate can help you avoid higher monthly payments in the future.
Variable-Rate Credit Products
Variable-rate credit products like credit cards and lines of credit have:
- A variable APR that can change as interest rates fall
- A monthly payment that adjusts based on how much credit you’re using
- An ongoing, revolving term
Keep in mind:
As rates rise, the APR on variable-rate credit accounts also rise, so you can expect higher monthly payments.