10 Things to Watch When Interest Rates Go Up

The Federal Reserve raised interest rates seven times in 2022, most recently by 0.25% in January 2023. As the Fed aims to cool inflation, which is near its highest levels since the 1980s, more increases might be on the horizon.

This aggressive rate raising strategy can take a toll on many aspects of consumer life, possibly for years to come. To protect your money, learn more about what to watch when interest rates go up:

Variable Loan Rates Rise

Borrowers holding a variable prime rate loan, also known as an adjustable rate loan, will see their payments rise as interest rates rise. Unlike a fixed rate loan, the cost of a variable loan can climb quickly.

“The long-term effects can be really huge,” Matt Schulz, chief credit analyst at LendingTree, says. “We’re talking about thousands and thousands of dollars paid in mortgage interest, personal loan interest and auto loan interest, and all of that adds up.”

When interest rates are poised to rise, it may be wise to convert a variable loan into a fixed loan or pay off the variable loan as soon as possible.

Bond Markets Fall

Bond markets tend to fall as interest rates rise. In May 2022, Fed Chair Jerome Powell announced the central bank would reduce its $9 trillion stockpile of Treasury bonds and mortgage-backed securities starting in June to further reduce market liquidity.

Short- and long-term U.S. Treasury bond yields, however, are currently up year over year and month over month. Consider adjusting your investment strategies accordingly.

Certificate of Deposit Returns Rise

CDs can offer better annual percentage yields when interest rates rise – and be attractive to new investors. Those holding a long-term CD at a lower rate, however, may want to consider withdrawing funds early (after taking into account the penalty costs) when interest rates rise significantly.

“For those who already have CDs who may be comparing their old CD rates to the newly increased CD rates, they may feel they are missing out,” Simon Zhen, chief research analyst at MyBankTracker.com, says.

“One tip I have is called laddering, a strategy some people use so they’re not so tempted to jump around when interest rates change and every year you are taking advantage of the highest CDs at that point in time and diversifying your CDs,” he says.

Savings Account Returns Rise

Banks are often inclined to raise savings accounts rates when interest rates rise but this isn’t always the case.

“Bank balance sheets and total deposits have bloomed to more than they know what to do with,” Zhen says, citing pandemic-era stimulus payments.

“While Fed interest rates may be increasing, banks might not have that same level of urgency to increase savings account rates alongside them,” he says. The average annual yield on a standard savings account is 0.33% as of January 2023.

Money Market Account Returns Rise

Like savings accounts, money market funds can see a greater rate of return following an interest rate hike. Typically, a money market account offers a higher rate of return than most checking or savings accounts. These funds often invest in financial instruments such as CDs, bankers’ acceptances and repurchase agreements.

Mortgage Costs Might Rise

The 30-year fixed rate mortgage is based on the long-term outlook for interest rates, and prospective buyers will see their costs rise as interest rates rise. Buyers can opt for a 15-year fixed rate mortgage instead and benefit from a lower interest rate (but incur higher payments each month under the shorter loan term).

The national average 30-year fixed mortgage interest rate was 6.42% and 5.72% for 15-year fixed mortgages as of Feb. 1, 2023. Homeowners with fixed rate mortgages won’t be affected by rising interest rates.

Credit Card Rates Rise

When interest rates rise banks typically charge customers more to borrow money – including borrowing on credit cards. The average credit card interest rate is 21.57% for new offers and 19.07% for existing accounts as of Jan. 30, 2023.

Consumers who have cards with variable APRs will typically see rates rise as the prime rate rises.

Credit card debt is often the first place consumers feel the affects of an interest rate hike, Schulz says, adding, “That’s a really significant thing, especially given that most Americans are on a tight budget and have a very thin financial margin for error.”

Your Credit Score May Fall

Higher interest rates can cause those with mortgage and credit card debt to struggle as payments rise, leading to missed payments and delinquent accounts. As a result, borrowers may see their credit scores fall when interest rates climb.

“There’s only so long that it’s realistic for people to continue to be able to make payments as interest rates continue to rise and debt continues to rise,” Schulz says.

“We haven’t seen delinquencies rise across the board in a huge way yet. They’re trending that way, but I think we’re going to see late payments increase and when that happens, then you’ll see credit scores start to decrease.” he says.

Personal Loan Costs Rise

Personal loan rates are relatively low today but may soon rise as interest rates climb in the coming years.

“High interest rates affect so many aspects of life,” Schulz says. “It makes it more expensive to get a car, it makes it much more expensive over time to buy a house. Even things like personal loans for debt consolidation and credit card refinancing.”

If you think you might need a personal loan to finance an upcoming large purchase. consider locking in a lower rate now.