20 Ways Interest Rate Changes Affect You

Find out how changes in interest rates cause a ripple effect across the market.

Interest rates might seem like a financial concept that doesn’t affect you personally, however, changes in interest rates can affect you a great deal regardless of what stage of life you’re in.

If you save, invest, take out loans, use credit cards, travel overseas or run a business, changes in current interest rates can affect your financial well-being. Take a look at 20 ways interest rate changes can affect your daily life and why you’re getting a certain interest rate.

How Rates Affect Investors

Changes in the fed interest rate or prime rate and other interest rates can affect your investments in a number of ways. Here’s how changes in interest rates affect investors:

1. Stock Investments

Interest rate movements affect savings account interest rates as well as stocks’ and mutual funds’. However, the correlation is not as direct. On the one hand, rising rates make doing business more expensive for many companies; however, rising rates often accompany economic growth, which translates into more profits — and higher stock prices — for companies.

Read: 2017 Interest Rate Forecast — How the Fed Rate Hike Will Impact You

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2. Investing Rates

Savings account interest rates are clearly affected by interest rate movements. Stocks and mutual funds can be affected as well, but the correlation is not as direct.

Rising rates make doing business more expensive for companies. Rising rates also enable them to achieve economic growth, which translates into bigger profits and higher stock prices for investors.

3. Certificates of Deposit Rates

CD interest rates also change as interest rates rise. When you buy a CD, you might participate in an auto-renewal program that automatically reinvests your CD when it matures at the current interest rate. If interest rates are rising, your CD rate will climb, too.

Learn: CD Rate Strategies for the New Interest Rates

How Rates Affect Business Owners  

Businesses are also affected by changes in the interest rate. Here are some ways interest rates affect business owners:

4. The Cost of Credit

If you own a business and you finance it with a credit card or a business loan, you have an interest rate tied to your debt. Small Business Association loan rates are typically fixed, but credit card rates can rise and fall with interest rate movements.

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See: 10 Effects of Inflation — and How to Protect Your Money Now

5. Issuing Bonds

If your business is well-established, you might be able to raise capital by selling bonds to investors. The interest rate you’ll have to pay on your bonds will be based on a combination of your company’s perceived credit quality and current market interest rates. In a low-rate environment, selling bonds can be an inexpensive way to finance your business.

6. Foreign Currency Exchange Rates

If you do business overseas, you have to buy and sell in foreign currencies. If the U.S. Fed rate rises, the U.S. dollar tends to increase in value, making the goods you sell more expensive for overseas buyers.

Conversely, if the U.S. dollar falls, your foreign buyers will be able to purchase your products less expensively. Interest rates can directly affect the profitability of your business.

7. Money Market Funds Rates

Most businesses keep a slush fund account for petty cash or excess capital. Earning interest on this money by putting it in a money market fund can be a shrewd move.

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Bank interest rates on money market accounts fluctuate based on current market interest rates, so in this scenario, rising rates could benefit your business. In 2017, money market funds hovered around a low 0.08 percent but increased to 0.48 percent as recently as 2009.

Check Out: 10 Best Money Market Accounts and Rates

How Rates Affect Homebuyers

Interest rates have a significant effect on a lot of details associated with homeownership. Whether you’re buying a home or already own one, here’s how interest rates affect you:

8. Fixed Mortgage Rates

If you already have a fixed-rate mortgage, interest rates moves won’t affect you. When you take out your next mortgage loan, however, you might see that mortgage interest rates have moved a lot. If banks anticipate that future interest rates will be higher, they’ll offer mortgage loans with higher rates.

9. Adjustable Mortgage Rates

An adjustable mortgage’s rate consists of an index rate plus a margin. The index rate is typically based on the London Interbank Offer Rate and the margin is the profit the lender builds in.

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If LIBOR rates rise, your adjustable-rate mortgage will also rise. Most adjustable-rate mortgages are recalculated annually, although they’re typically fixed for the first three, five or seven years.

Find Out: How to Get the Best Mortgage Rate

10. Refinancing Rates

You might consider refinancing any outstanding loans at some point. Refinancing rates are affected in the same way as new auto loans and home mortgages. So a falling rate environment could be the perfect opportunity for you to refinance your loans.

11. Home Equity Lines of Credit Rates

HELOC rates are tied to the prime rate. If your HELOC has a variable rate, it will rise and fall with the prime rate. Because a rate hike won’t affect a fixed-rate HELOC, consider talking to your lender about swapping your variable-rate HELOC for a fixed-rate one if rates look like they’re trending higher.

How Rates Affect Young Professionals

Changing interest rates can affect everything from credit cards to student loan rates to auto loans. Because young professionals typically use these products, here’s what’s in store for them:

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12. Credit Card Rates

Some people see credit cards as a bridge between buying things now and paying for them later — and forget that credit card loans aren’t free. In fact, credit cards typically charge 15 percent to 20 percent interest — and sometimes higher.

Credit card interest rates are tied to the prime rate. If interest rates go up, so do credit card rates, which can increase the amount you’ll pay in interest if you carry a balance on your cards.

13. Student Loan Rates

If you already have a student loan with a fixed rate, rising interest rates generally won’t change that. If you’re about to take out a student loan, however, rising interest rates could boost your loan rate.

The federal student loan rate is tied to the May 10-year Treasury note auction and changes every summer. The auction’s outcome is influenced by the federal funds rate, which affects consumer interest rates.

Related: How to Get Out of Paying Your Student Loans

14.  Auto Loan Rates

The interest rate market also affects auto loan rates. If you want to buy a new car in the near future, you’ll be looking at a higher rate if interest rates are on the rise. For example, in 2017 you can get a 48-month new car loan — so far — for around 2.49 percent, but in 1981 that rate was closer to 17 percent.

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How Rates Affect Retirees

If you’re retired, you should know that interest rates affect your Social Security payments and some of your investments. Here’s what you should take into consideration when planning

15. Your Social Security Benefits

Changes in interest rates can have a significant effect on retirees who are living off Social Security. Every year the Social Security Administration adjusts benefit amounts based on the rate of inflation; this is called a cost-of-living adjustment. Because rates tend to rise in periods of higher inflation, Social Security payments will, too.

16. Fixed Annuity Rates

Fixed annuity rates are tied directly to the interest rate market and they typically move in the same direction as U.S. Treasury rates. For example, a 10-year fixed annuity will pay a rate that rises and falls in tandem with the 10-year U.S. Treasury rate. Although fixed annuity values are typically stable, if you need to cash out early and rates have risen, you might face a market value adjustment and receive less money than you invested.

Related: 5 Best Annuities for Your Financial Plan

How Rates Affect Families

You might be surprised at how interest rates can affect typical family costs and investments. Take a look at two ways:

17. Food Prices

Agricultural businesses incur higher costs when interest rates rise. Because these are the companies that produce food, you can expect to see higher prices at grocery stores if interest rates rise.

Food prices, however, are affected by numerous other variables that could counter the price increases that higher interest rates trigger. Factors such as supplier issues, energy costs, weather, and supply and demand also impact food costs.

18. College Savings Plan Rates

If you’re a young professional you might be thinking about starting a family, which means starting a college savings plan. You can spread the money in a 529 college savings plan across a number of different investments — typically mutual funds — and earn tax benefits. Rising or falling interest rates will affect your college savings plan investments the same way they would affect your 401k or IRA.

When rates rise and fall, your fund interest rates will, too. If your plan includes mutual funds that invest in bonds, a rise in interest rates will likely cause the share price of your funds to drop slightly.

How Rates Affect Travelers

Jetsetters take note: The interest rate fluctuations can affect your travels. Here’s what you need to take into consideration when figuring out travel expenses:

19. Travelers’ Costs

One variable many travelers overlook is the movement of the U.S. dollar versus world currencies. Because the U.S. dollar tends to go up in value during periods of rising interest rates, going abroad at the right time could save you money. When rates are falling — and the U.S. dollar is, too — you might want to remain stateside.

20. Cash Advance Rates

If you find yourself short on cash, you might need to use your credit card for a cash advance. Interest rates will also affect the rate you pay when you take a cash advance — if rates are rising, expect to pay more when you conduct this transaction.

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About the Author

John Csiszar

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.

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