The Federal Reserve’s move this week to raise a key interest rate signals one thing for consumers — brace yourself for higher interest rates everywhere.
While in some cases this is good news — savers will be happy to hear that certificates of deposit (CDs), savings accounts and money market accounts will likely get an annual percentage yield (APY) lift — most people probably thought about how this will impact their debt. Americans carry more than $4 trillion — yes, TRILLION — in consumer debt, and while interest rates on the loans you currently hold may not rise, new loans and any outstanding loans with variable or adjustable rates will likely see higher APRs.
Here’s a quick, at-a-glance guide to how your loans will potentially be affected:
Credit Card APRs: Fixed-rate credit cards are essentially a thing of the past. The vast majority of cards from the major issuers are variable-rate, meaning that the cards’ annual percentage rates (APRs) can rise with the Prime Rate controlled by the Federal Reserve. Rates on credit cards have already started to rise a bit in the past year, as issuers increase rewards benefits and sign-up bonuses in a more competitive market. But the Prime Rate increase will definitely have an impact on credit card APRs, and soon. This won’t be a problem for borrowers who don’t carry a balance on their cards or use cash advances with no grace period, but otherwise you could be paying more to borrow on your card. If you have a personal credit card, the issuer will notify you of the rate hike, per the CARD Act of 2009. Business credit cardholders may not be notified of a rate hike since CARD Act regulations don’t apply to them, but some issuers are starting to apply those federal laws to both types of cards. Keep an eye on your APRs for all cards, especially if you’re carrying a balance.
Mortgages: If you have a fixed-rate mortgage, you don’t need to worry about your monthly payment going up — you’re safe. But if you have an adjustable-rate mortgage, your rate will likely rise. And if you’re in the market to buy but haven’t found your dream home, you may want to discuss a rate lock with your lender or hurry up! Mortgage rates are continually adjusting, so the impact of the Fed decision on the mortgage market will be quick. Higher mortgage rates also limits how much house you can afford, which means the home price rebound will likely begin to slow (a good thing, home-sellers, to note).
Car Loans: Car loans have been some of the easiest loans to get approved for at some of the lowest APRs since the Great Recession. So much so, in fact, that some experts argue there’s a subprime car loan bubble burst on the horizon. Expect the Prime Rate hike to lift car loan rates slightly.
Business Loans: There are more than 44 different business financing options that can range in interest rate from 5% to 150%. Levi King, the Co-Founder and CEO of Nav, said businesses will see a tightened credit space just like consumers, but the impact will be felt differently depending on the type of financing. “If you’re borrowing money on a merchant cash advance at an average of 90% APR, you’re probably not going to notice a small rate hike. You’re already getting hosed, so a little bit of a higher rate, you’re not going to notice. Really, the people it’s going to hit are the people who are operating on low-margin projects. For example, if I want to open a second location for my Burger King franchise, the difference between a 7% and 8% interest rate on an SBA loan could mean it doesn’t pencil out, and I’m not going to do it.”
Savings Accounts: APYs will likely rise, and your savings will make more money for you. The impact won’t be as immediate on APYs as it will be on APRs, however. CDs and those who use CD laddering to keep some liquidity will be happy to see some movement, especially since even the best APYs haven’t been yielding more than about 1% for years.
Your Silver Bullet: Better Credit Scores
Luckily, you aren’t just a slave to higher interest rates. You do have a very easy way to counteract a rate rise — work on improving your personal and business credit scores. Unless you already have a top-tier credit score, a better credit score will earn you better rates on everything from credit cards to business loans. Here are some tips to get you started.
1. Check Your Credit
If you don’t know where you stand, you’re already losing the battle. Since the vast majority of consumer and business financing options rely on a credit score to get you approved, you need to know what your credit score is before you can start working on it. You can check your business credit scores for free on Nav.
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2. Correct Inaccuracies
Your credit scores are based on the data in your personal and business credit reports. Personal credit reports are required to have a dispute process through which consumers can contest inaccurate information — you’ll need to dispute the same mistake at each of the credit bureaus individually. Business credit reports don’t have to follow the same rules as personal credit reports in this regard, but you can still dispute inaccuracies to correct mistakes that might be sinking your score.
3. Tackle High Utilization
Credit utilization is one of the most important factors of your credit score, measuring how much of your lines of credit and credit card limits you’re actually using every month. If you’re using 30% or more of your limits, you may be hurting your scores. You can help this ratio in two ways: lower your credit card spending or add a new credit card to increase your total credit limits and lower that utilization rate (just be sure to not increase your spending because you have a new card, otherwise the point is moot.)
4. Don’t Be Late!
Your payment history is the most important part of your personal and business credit scores. That’s why making a late payment or missing one entirely is one of the most damaging things you can do to your credit. Keep up with your on-time payments and creditors are much more likely to give you a better interest rate.
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