How to Financially Prepare for Rising Interest RatesRecently, the Federal Reserve raised its benchmark interest rate, the federal funds rate, by 25 basis points to a range of 2 percent to 2.25 percent. This puts the rate back to where it was in April 2008, taking us out of the unique low interest rate environment we’ve been in for a decade. With one more increase projected before the year ends and with additional increases expected for 2019, we thought it to be a great time to talk about how you can position yourself to take advantage of increasing rates. Keep reading to learn how you can make sure you’re ready to benefit from the changes that’ll be happening to the economy over the next year.

The pros and cons of rising rates

To fully take advantage of rising rates, you’ll need to understand how they’ll affect your finances. This is something we’ve covered both this year and last year when rates went up, but briefly, you should know that borrowing will become more expensive and that banks will begin to offer better savings options. The negatives will most acutely be felt by credit card users and the positives by certificate of deposit account holders. It’s worth noting, though, that even financial negatives can be turned into positives if you’ve successfully organized your finances.

Organizing your finances to benefit from rising interest rates

Minor changes to your finances today can put you in a good financial spot for the near future, here are some suggested financial dos and don’ts that you should consider right now.

  • Lock in rates for the debts that you can. If you’re planning on taking on long-term debt relatively soon, either in the form of a student loan, mortgage or car loan, make sure you look for fixed-rate loans and that you lock in the loan before an expected rate hike. This will prevent you from paying more over the life of the loan than you otherwise would with a variable rate loan.
  • Take your banking online. Generally, when the Fed raises its rate, banks slowly increase their APYs on saving accounts, certificate of deposits (CDs), money market accounts and more. All banks aren’t created equal, though, and it’s worth noting that traditional banks, especially the larger ones, haven’t budged their rates very much (if at all) since the Fed began raising its interest rate in 2015. If you’re holding out with the hope that your brick-and-mortar bank will get with the program, don’t hold your breath. While experts expect to see some movement now that the Fed is committed to a plan of action and is on track to raise rates consistently, it’s online banks that are most sensitive to the Fed’s changes. For example, Discover bank, which offers the highest APYs of any online bank we review, currently provides a savings account APY of 1.90%, blowing the rates at many other banks out of the water. As such, you’re better off just switching to an online bank rather than waiting for the APY change with a traditional bank.
  • Hold off on getting lengthy CDs. The rates on CDs are rising, and investing in one in the near future could be pretty rewarding. That said, don’t jump the gun, as the Federal Reserve plans on raising rates several times in 2019. Since CDs lock in your money for several months or years, which means you’ll pay a penalty for early withdrawals, putting your money in a CD now won’t get you as good of a rate as you might get when the Fed raises rates again. That said, if you don’t want to wait, you might consider shorter-term CDs, like 6 month to 1 year CDs, and then use those earnings to invest in a longer-term CD once rates have gone up.
  • Use credit cards strategically. As we pointed out, the cost of borrowing money will increase for borrowers. This will most acutely affect credit card users as most cards tend to have variable interest rates with their interest rates fluctuating within a specific range. Expect more cards to charge rates closer to the higher end of their interest rate range. Ideally, you’ll want to use credit cards more strategically if you already don’t. If you’re not sure how to pull this off, we’ve got you covered. Our guide to avoiding rising interest rates explains how a balance transfer credit card allows you to do exactly that.

Although the economy’s changing, that doesn’t mean your financial life has to be in disarray. For more advice on tightening up your finances, keep reading our personal finance blog. And if you’re in the market for a credit card, check out our reviews of the best credit cards.