When interest rates rise, it can affect the cost of debts that have adjustable rates, such as credit cards and loans. It also can have indirect effects on the credit scores of those who are paying down their debts, especially if the tighter budgets caused by rising rates lead to late or missed payments.
The Federal Reserve increased its key interest rate by a quarter point on Wednesday in an effort to slow inflation, which has reached worrying levels. That means it will likely be more expensive for consumers to borrow money to buy homes, cars and other big ticket items. However, savers might get a boost, as interest rates on savings tools are expected to rise too.
In addition to making it more costly for borrowers, rate hikes can hurt companies that need to raise capital for expansion. In the short term, this could cause stock prices to fall. However, in the long run, higher rates can help ration the flow of “free” money in the economy, steering resources to profitable companies and away from those with little prospect for sustainability.
Consumers who have mortgages, auto loans or credit cards with variable rates should see those rates rise by the same amount as the Fed’s increase, within one or two billing cycles. Those with fixed-rate loans will not be affected by the change. Credit card rates are usually based on an index plus a margin, so they will generally reset more frequently and may lag the Fed’s change by as little as one or two months.
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