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Are Rising Interest Rates Good for Anyone? (6 Ways the Higher Rates Actually Pay Off)

·5 min read

The Federal Reserve announced a small rate increase in March of this year (2022), which was the first hike in three years. The change can affect a number of things you may have in your financial life from stocks and bonds to how much you pay for your home mortgage each month and your credit card APR.

But rising interest rates may not be all bad. There are ways for you to take advantage of the rate hike. Here are a few steps you can make with your finances to potentially find success with higher rates.

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1. Savings accounts

One of the best ways to take advantage of increasing interest rates is with a savings account. In fact, you may already have one as part of your current budgeting strategy.

Savings accounts haven’t had high interest rates in many years, but a rise in the federal funds rate could mean an increase in the rates on your account. That means every dollar you put in could be working for you by earning interest.

Pro tip: Think about pulling together a budget so you know how much extra you may have each month. Add that to your savings account to take advantage of higher rates. You may want to also do some research on which banks offer the best savings accounts and consider moving your money there.

2. New home mortgages

The housing market has been tight in recent months for a few reasons, such as low inventory and high costs for materials to build new homes. One of the other major factors has been low interest rates.

If you’ve been looking for a home, now may be a good time to buy in the highly competitive market. Sit down with your estimated monthly mortgage costs and see if it’s better to spend money today — possibly with an offer above the asking price — than waiting too long and having a rise in rates affect your estimated costs.

Rising rates could also make some buyers pull out of the market, which could decrease competition. That may be good news for potential buyers who have been outbid in this ultra-competitive market or who haven’t been able to find a home available in their price range just yet.

3. Fixed-rate mortgages

Changes to the interest rate may also affect those who already own a home. If you have an adjustable-rate mortgage, you may want to talk to your mortgage lender about switching to a fixed-rate loan. It might cost an additional fee to make the switch, but it could also save you in the long run.

An adjustable-rate mortgage may have been a good idea as rates went down, but locking in a rate now could save you some extra cash down the road as rates move higher.

Pro tip: Do some research on the best mortgage lenders and see what rate you may be able to get now. Also, ask how high they may expect rates to go in the short and long term.

4. Credit card payments

One of the downsides of increasing interest rates is it could affect the APR, or annual percentage rate, on your credit cards. That may not be good if you’re a cardholder who carries a balance from month to month or prefers to simply pay the minimum each month.

While it’s always a good idea to pay your balance in full each month, with rising rates it’s important for your financial health. Find a way to achieve your goal of paying off your credit cards. Paying the card now could save you money later on as rates go up and the credit card issuer decides to change your APR.

Pro tip: If you can’t pay your card down just yet, use this time to apply for one of the best 0% APR credit cards. That way you can transfer your existing balance without incurring a ton of interest charges as you weather the interest rate storm.

5. Bank stocks

One of the sectors that benefits from increasing interest rates is the banking industry. If you have a stock portfolio as part of your financial plan, you may want to look into particular stocks or an ETF, or exchange-traded fund, that focuses on financial services.

Along with the banking industry, you also may want to consider other sectors that do well with rising rates. Noncyclical stocks, such as energy and consumer staples, may be a good place to put some money as interest rates might boost the prices of those goods higher.

6. Short-term bonds

Unlike bonds with longer terms, short-term bonds tend to be less risky and not as sensitive to changes in the interest rate. Adding them to your investments may keep your overall portfolio in good standing as other assets could be negatively affected by changes in the interest rate.

But if you plan to invest in short-term bonds, remember that they also may not make as much money as a long-term bond. Review your options and remember that while gains may not be as high, you also may be taking on less risk.

Bottom line

As interest rates begin to inch higher, now may be a good time for you to find new investments that could help you take advantage of changes in interest rates.

Keep an eye on future announcements by the Federal Reserve — the Federal Open Market Committee, which sets interest rates, has eight regularly scheduled meetings a year — and make adjustments to your financial portfolio that could help you weather the changes.

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This article Are Rising Interest Rates Good for Anyone? (6 Ways the Higher Rates Actually Pay Off) originally appeared on FinanceBuzz.