Revolving credit accounts — like credit cards, store cards, and lines of credit — have a variable interest rate that is tied to the Prime Rate. Some mortgage and student loans can also have a variable interest rate. When the Fed raises the Federal Funds Rate, the Prime Rate increases and so does the annual percentage rate (APR) on your variable rate credit accounts.
The impact on you
A slight increase in interest rates is not going to make much of a difference for most people. How much impact rising rates will have on your finances depends on how much revolving debt you have — the higher your balances, the more you’ll pay in interest charges.
In this example, a credit card customer has a balance of $3,000 and is making only the minimum monthly payment. You can see that as rates rise, so do the monthly payments and the amount of time it will take to pay off the $3,000 balance.
Here’s how rate increases could impact your payments
(examples for illustrative purposes only)
|At 14.00% APR ||At 14.25% APR ||At 14.50% APR ||At 14.75% APR ||At 15.00% APR |
|Minimum monthly payment on a $3,000 balance ||$65 ||$66 ||$66 ||$67 ||$68 |
|Time it will take to pay off the $3,000 balance ||162 months ||163 months ||163 months ||164 months ||165 months |
|Total interest paid over time on the $3,000 balance ||$2,666.11 ||$2,722.08 ||$2,775.29 ||$2,829.58 ||$2,884.00 |
What can you do to minimize costs?
Nobody knows how much or how often rates will rise going forward, so it makes sense to start thinking about how you can minimize your borrowing costs now.
Pay off high-interest revolving debt
Reduce the balances on your credit cards, store cards, and lines of credit as soon as possible. As rates rise, so will the amount of interest you pay over time.
Make more than the minimum monthly payment
Making only the minimum payment each month will result in paying significantly more interest over time — and taking longer to pay off your debt. The more you can pay each month, the more money you’ll save over time.
Consider consolidating your balances
When you consolidate your revolving credit balances with a fixed-rate, fixed-term personal loan, you’ll have a single monthly payment that stays the same — no matter how high the Fed raises rates. And you’ll know exactly when your loan will be paid off.
Learn more about consolidating debt.
Avoid late payments
If you wait to pay down your balances and start missing payments, the penalty interest rates on your credit cards could increase your costs significantly — most cards impose rates of 23% to 30% on your balance when you’re late on one or more payments.
Explore your adjustable rate mortgage (ARM) or home equity line of credit (HELOC)
Consider refinancing your ARM into a fixed-rate mortgage. And if you have a HELOC, you may be able to convert your balance to a fixed rate. This option would allow you to lock an interest rate on your balance.
Learn more about a home equity fixed-rate advance.