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Rising interest rates - What do you do?
What to do with your money as interest rates rise
During the last two years, the record low interest rates that millions of people have enjoyed have gone away. The rates are rising and it looks like they will continue to do so. How does that affect you? What do you do about it?
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Rising interest rates mean you need financial discipline
Money is like anything else we deal with in modern society - it’s a commodity. It can be bought and it can be sold. Over time, the price of buying money changes. That cost is interest and for the past five years or so, the price of money and associated interest rates have been cheap. It’s been a great time to borrow money, and millions of people have taken advantage of the opportunity to refinance their houses and do all manner of other things with cash that used to be unaffordable. But the rates are rising again, and the cheap money that used to be available isn’t so cheap anymore. What should a savvy consumer do about the rising cost of cash? How does this affect the average person?
Here are some things to consider as interest rates rise:
- Pay off your credit card debt - Credit card interest rates are among the highest that most consumers usually encounter. Rates of as high as 30% are not uncommon. It is an expensive way to borrow, even in the best of times. As rates rise, the high cost of credit card debt becomes even higher. If you carry a balance, you need to think about paying off as soon as you can. Make sure that you pay more than the minimum payment; the minimum is designed to keep you paying interest for as long as possible, and you don’t want that.
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- Consolidate your debt - If you have a lot of credit card debt, you may wish to consolidate several high-interest loans into a single, lower-interest loan. Transferring several balances to a card with a low promotional interest rate might work; you might also consider taking out a home equity loan to consolidate your debt. The interest is tax deductible. Be aware, however, that you are replacing unsecured credit card debt with a secured debt in the form of a home loan. If you transfer credit card debt to a home equity loan and you default, you could lose your house to foreclosure.
- Consider a fixed rate mortgage - If you have an adjustable rate loan, you can expect it to continue to adjust upwards for the foreseeable future. This would be a good time to think about refinancing and taking out a 15 year or 30 year, fixed-rate loan instead. The payments would be somewhat higher initially, but over time, you will almost certainly save money.
- Convert a home equity line of credit to a fixed-rate loan -Lines of credit are convenient, but they have adjustable rates that tend to be higher than for fixed rate loans. Check with your lender to see if converting your line of credit to a fixed-rate loan might be good for you.
As rates rise, smart consumers keep track of how those increases will adversely affect them. Pay attention, as failure to do something could cost you thousands of dollars as rates continue to rise.
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