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Six Ways To Prepare Now For Rising Interest Rates

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Take Steps Now to Soften the Impact

For several years before 2005, interest rates were at historic lows, enticing people to spend more on credit. When interest rates rise, what do higher rates do to your personal finances? When you hear of the possibility of rate hikes by the Federal Reserve (the Fed), is there anything you should do to prepare?

When the Fed starts pushing up the interest rates, credit card debt, mortgage rates, and rates on car loans are affected. The average US household debt, according to the Fed, is $20,000, not including mortgages. Most of that debt is credit card debt and home equity lines of credit, so people with this type of debt will be affected most.

If you're struggling to pay your credit card bills each month or you pay your bills but can only swing the minimum payment, even a small rise in rates could be a problem. Over time, as the rates gradually continue to rise, more and more of your monthly payment will go towards interest and less and less towards paying off your balance. For help on getting out of debt, see Credit and Debt Guide.

Here are six ways to prepare yourself to come out ahead:

  1. If you're only making minimum payments on your credit cards, start paying more. If you can't come up with the money to increase your payments, start budgeting or tighten your existing budget, cut spending, and pay down credit card debt with the money you save. For budgeting help, see Budgeting 101.
  2. Don't be fooled by your "fixed rate" credit cards. Your credit card company legally must only give 15 days written notice before raising your rate. Even so, if interest rates are expected to increase and you haven't already transferred your balances to lower-rate cards, you should consider doing so, looking for those that promise a low rate for a specific period of time. For advice on the fastest way to reduce your credit card debt, see Get Out of Debt Now.
  3. If you have a home equity line of credit, consider taking out a home equity loan to repay it if interesst rates are expected to rise. Since interest rates on home equity lines of credit are tied to the prime rate, if rates rise, so will the interest on your loan. Depending on how much you borrowed, this could quickly become a payment you can't afford, and your house is at risk. By replacing the home equity line of credit with a home equity loan, you lock in a lower interest rate. See Home Equity Loans: Look Before You Leap.
  4. If you have an adjustable rate mortgage, and you plan to be in your home for at least five years, consider refinancing to a fixed rate mortgage when rates are expected to rise. See How To Take Advantage of Lower Mortgage Interest Rates.
  5. As mortgage interest rates rise, you'll be able to afford less house for your money, so if rates are expected to rise and you're in the market for a house, consider stepping up your house-hunting efforts. Be sure to research real estate trends in your area so you don't buy at a period of inflated home prices. See Mortgage Information and Advice.
  6. If you're in the market for a new car, consider accelerating your plans before interest rates rise, possibly taking advantage of zero percent financing. These offers often disappear as rates rise. See Save Money On Your Next Car.

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