The recession of 2009 taught many Americans the value of smart credit habits. The Federal Reserve’s decision to raise the national interest rate means it’s time to put those lessons to use.
Take care of outstanding credit issues while rates are low. As the unemployment rate drops, Federal interest rates are likely to rise. While rates are low, it’s important to pay down any existing lines of credit before another climb.
If the Federal Reserve declares the economy is getting stronger, it is likely to raise national interest rates. These hikes will directly affect lines of credit; specifically credit cards and Home Equity Lines of Credit (HELOC).
Raising short term rates (increasing the costs to borrower money) discourages or limits businesses to raise the price of their goods or service they sell. Raising short term rates is the primary weapon the Fed uses to fight inflation. Since 2008, U.S. inflation has remained relatively stable.
When unemployment was at its lowest, the credit rate saw the highest spike. In a three-year span between 2004-2007, rates climbed from 5.25% to 8.25% – an average of one point per year. We jump into the 2016 calendar with an interest rate of 3.5%, a 4.75% decrease from the high-point in 2007. This is the first increase in seven years since the Federal Reserve locked the rate at 3.25% in September of 2009.
The best advice is to treat this interest rate climb with the lessons from the 2009 market recession. If the Fed’s gradual rate-hike is an indication of things to come, it’s important to sit down and check your finances to see how your existing debt from certain lines of credit might affect your monthly budget.
Take the time to pay down any outstanding balances when you can afford it. This will help minimize the effect of another Fed interest rate announcement on your wallet.