Today’s rising interest rates don’t feel like a cause for celebration. Nearly everything you buy on credit or with a loan becomes more expensive. The debt you owe from past purchases also costs you more, as those higher rates increase the amount of interest you pay on your total balance.
Worst of all, rising interest rates may lower your standard of living. Your paycheck may not keep up with the higher costs you are paying for credit, and merchants will likely pass the costs of their higher interest rates on to you in the form of higher prices for their goods and services.
But amid the dark clouds spawned by higher interest rates, there a few silver linings. Rising rates:
1. Encourage responsible use of credit. Higher rates can motivate you to cut back on purchases made on credit. Knowing that it’s going to cost you more than it used to, you may think twice about whipping out the plastic to buy that dress in the window or a dinner at a fancy restaurant.
2. Help you get a handle on your debt. America is on a consumer debt binge. Debt rose $19.6 billion to $2.84 trillion in May, an 8.3 percent annual increase. If that rate of increase were sustained, it would amount to more than $2,000 in consumer credit per household one year from now.
Higher rates can inspire you to limit your purchases to those things you can buy with cash and to pay off debt in order to eliminate the interest you have been paying. Living with little debt can make all the difference when the time comes to buy a home because a high level of debt could disqualify you for a mortgage.
3. Force big-ticket buyers to make a decision and lock in a rate. If you’ve been thinking about refinancing, remodeling, or buying a home, or about making another big purchase that requires credit, higher rates on the horizon could help to speed up your decision-making process.
Decide now on a loan and ask your lender to lock in a rate. If you are buying a home, make sure you get a fixed rate loan and ask your lender to include a “float down” provision that will allow you to get a lower rate if the option becomes available before you close.
4. Make it easier for homebuyers to get a mortgage. Lenders are slowly turning from refinancing to purchase loans, and they are putting more resources into competing for buyers. “Efforts by lenders to get more mortgage business is positive,” says John Walsh, founder of Total Mortgage Services. “Higher rates mean the economy is doing better, which is good for housing prices.”
5. Increase the rate of return on your savings. Rising rates increase the returns you see on your savings accounts, savings bonds, certificates of deposit, money market funds, and other accounts. That means your money will be doing some work for you, and you’ll finally begin to see some returns on the cash you have sitting in savings.
Interest rates have been at historic lows for years, and it is likely that they will continue to rise in the months to come. No one knows how much and how quickly they will increase in the short term, but it’s clear that there are some benefits to a rise in interest rates.
Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.