8 do's and don’ts to help you conquer the interest rate hike

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8 do's and don’ts to help you conquer the interest rate hike


On Wednesday, Dec. 16, 2015, the Federal Reserve raised interest rates by 0.25 percent after seven years of record lows.

What might this mean for you? The rate hike may result in an increase in interest rates for credit cards, mortgages, auto loans and student loans. However, it's not all bad news -- the interest you receive from savings accounts and bonds may increase, too.

Here are some do's and dont's to help you conquer interest rate hike.


Continue to pay off your credit card balances in full, if you can.

Most credit cards have variable interest rates, which are tied to a benchmark rate that in turn is often affected by the Federal Reserve's federal funds rate. Because of this, your bank may make changes to interest rates, and the interest you pay on balances you're currently carrying or future balances may also increase. You can avoid the extra interest by paying your credit card balances in full every month.

Consider sticking to your plans of buying a home if you're already in the market.

Changes to interest rates have traditionally affected the housing market considerably. It makes sense: Many people don't want to make a big-ticket purchase if interest rates are higher. But keep in mind that current mortgage rates are already at historic lows.

Even with the interest rate hike, it may still be worthwhile to buy a home, as mortgage rates and home-buying decisions are affected by much more than the interest rates set by the Fed. There are other factors that can affect the terms of your home loan, such as your credit history and the length of your loan. Fortunately, these are factors that you may be able to control.

Consider making a larger down payment if you plan to buy a home or a car soon.

While interest rates for mortgages and cars may rise after the Fed rate hike, you can pay less interest over time by putting a larger down payment toward your loan. All other things being equal, borrowing less money allows you to save money by having a lower principal for interest to accrue against. This may also decrease the length of time on your loan, lowering the number of payments you need to make.

Consider refinancing your private student loans if you have good or excellent credit.

Private student loans with variable rates could be affected by the rate hike. Refinancing your loans with a new consolidated loan can make your student loan debt easier to manage, giving you fewer payments to make and a potentially lower interest rate. If you have good or excellent credit, refinancing might save you as much as thousands of dollars in savings if you take out a new loan for the same amount at a lower interest rate and a shorter term. (But remember that if your refinanced student loan also uses variable rates, it could still be affected by the Fed rate hike.)

Private student loan lenders typically use your credit score as one factor to determine the interest rate you'll pay. If your credit is excellent or has recently improved, you may be able to take advantage of the currently low interest rates.

Continue to save for the future if you can.

The interest that banks pay on savings accounts, money market accounts or certificates of deposits (CDs) could also increase with the Federal Reserve rate hike. With increased interest rates, savers could see a bigger return on their cash. Also, adjustable-rate CDs may allow you to take advantage of any future interest rate increases, as you may be able to adjust the interest on your deposit without extending the time of your deposit.


Be surprised if there's no immediate change to your monthly statement.

Banks generally adjust rates on a monthly or even quarterly basis, not in real time, and the effect on the market of the Fed interest rate increase could take time to develop. If your credit card or other loans have a variable interest rate, you may not see any changes until your next monthly statement or later.

Forget that auto loans generally have fixed interest rates.

If you already have an auto loan with a fixed interest rate, you shouldn't see any changes with the Federal Reserve rate increase. If you want to buy a new car, keep in mind that interest rates are still at a historic low -- car dealerships, banks and credit unions are still competing fiercely for your business.

Be nervous about your federal student loans.

The Fed rate hike shouldn't have an immediate impact on most federal student loans. For federal Stafford and PLUS loans, the interest rates are currently set by statute to adjust on July 1 every year and are tied to the average one-year constant maturity Treasury yield or 91-day Treasury bill (which, in turn, can be influenced by the federal fund interest rate).

Also, interest rates for federal student loans disbursed after June 2006 are typically fixed for the entire term of the loan, so whatever rate you received when your federal loan was first disbursed will stay the same.

However, if your student loan interest rate is variable, there's no guarantee it won't change.

Bottom Line

Economic markets aren't totally predictable, but any effects of the increased interest rate generally shouldn't be too immediate or severe.

What's important is to continue your good financial habits. Do your best to pay your credit cards on time and in full every month to avoid paying interest. Remember, you don't need to carry a credit card balance and pay interest to build an excellent credit score.

In addition, try to save money if you can so you can make larger payments toward your loans. This will allow you to pay off the principal sooner and pay less in interest over time.

About the Author: Korrena Bailie is Credit Karma's Managing Editor. She's been writing and editing personal finance content since 2012. When she's not scanning personal finance-related Google Alerts, she's climbing, traveling to countries where it rains all the time (ahem, Ireland) or talking to her cats as if they're people.

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