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What Rising Interest Rates Mean for You

If you’ve been waiting for the right moment to get out of consumer debt, there’s no time like the present to finally give it the boot. The federal interest rate is on the rise from 1.5% to 1.75% (and is predicted to inch up throughout the rest of the year). That means the interest rates on those “affordable” consumer debt payments are going to jump up too.

According to the latest numbers from the Federal Reserve, household debt in America has reached $13.15 trillion.(1) And $834 billion of that total alone is consumer debt—specifically credit card debt.(2)

What Causes Interest Rates to Rise?

You might think interest rates would rise during a recession, but the opposite is actually true. Federal interest rates rise when the economy is booming. During a recession, the Federal Reserve adjusts the interest rates in an effort to try and stimulate the economy (also known as trying to get people to spend their money).


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Usually when times are tight, people aren’t as interested in borrowing money. So, the Federal Reserve lowers interest rates to encourage people to spend more. But when the economy is on an upswing, people feel confident about borrowing money, taking out a mortgage, or applying for that extra credit card and personal loan.

What Rising Interest Rates Mean for Consumer Debt (Credit Card Debt)

If you’re still using a credit card, this is where it’s really going to hit you. Anyone who carries a balance on their credit card will see an interest rate spike.

Let’s say you carry a revolving balance of $10,000 on your credit card every month (the average U.S. household carries a balance of $15,983)(3) with an average credit card interest rate of 16.83%.(4) A quarter-point increase could add an additional $25 a month in interest to your bill! That’s an extra $300 leaving your pocket each year all thanks to credit card interest.

The good news is, if you’re already paying down your consumer debt as part of your debt snowball, the amount you still owe will become less and less as you progress. That means you’ll also be charged less in interest. If that’s not another great reason to take control of your consumer debt and spending habits, we don’t know what is!

Are Home Mortgage Interest Rates Rising?

For current mortgages, it all depends on what type of mortgage you have. If you have an adjustable rate mortgage (ARM) or a HELOC, you might want to brace for impact. Since those mortgage rates aren’t locked down, there’s always the chance they’ll increase—and that’s especially true when interest rates go up.

You might not see a huge jump in the beginning. But by the end of the year, that quarter-point hike could be pretty noticeable. If you have an ARM on a $200,000 home, your monthly mortgage payment could increase by around $30. It might not sound like that much. But if you’re already strapped for cash, it can be hard to come up with an extra $360 a year!

That’s why it’s never a good idea to take out a home mortgage with an adjustable rate. We’ll always tell you to opt for a conventional, fixed-rate mortgage with a term of 15 years (or less).

Keep in mind that this surge in interest rates will impact people purchasing homes from this point on—even those who go with a fixed-rate mortgage. Anyone looking to take out a new mortgage will have to take on these new interest rates.

You should also know that mortgage interest rates are still relatively low when you consider what they’ve been over the last 20–30 years. So, don’t panic and buy a house before you’re ready just because interest rates are rising.

We know it may seem like there are a lot of dos and don’ts when it comes to mortgage rates. But with a little bit of research, it’s easy to see why a 15-year, fixed-rate mortgage is the best way to go. If you’re looking for a trusted mortgage expert, reach out to our friends at Churchill Mortgage.

What About Student Loans or Auto Loans—Will My Rate Increase?

You probably won’t notice much of an increase when it comes to student loans or auto loans you already have. Most of these types of loans are taken out at a fixed rate—meaning the interest was locked in when you signed on the dotted line for the loan.

Still, auto loans and student loans taken out from this point on now fall under these rising interest rates. That’s another good reason to stop taking on new debt and save up to pay for a used car or college tuition with cash.

Why Rising Interest Rates Can Be a Good Thing

Here’s the good news: if you’ve been saving and investing, these rising interest rates can have a positive impact for you! Banking interest rates will increase, and that means your rate of return on things like savings accounts, money market funds, and CDs will go up as well.(5)

Translation: it always pays to save, but now it’s going to pay a little bit more. Talk with a SmartVestor Pro if you need more guidance when it comes to savings and investing.

What Can I Do About Rising Interest Rates?

Pay Off Your Consumer Debt

If you’re swimming in consumer debt (no matter how large or small it is) pay it off!

The best way to pay off your consumer debt is to use the debt snowball method. That’s where you pay your debts off from smallest to largest. Pay as much as you can toward the smallest balance while making minimum payments on the rest of your debt. The snowball gains traction as you pay off each debt and roll over what you were paying on the last debt into the next.

Use Rising Interest Rates to Your Advantage and Keep Saving

If you’re out of consumer debt (with the exception of your home), keep on saving for your fully funded emergency savings of three to six months of expenses. Thanks to the rising interest rates, your savings will grow a little bit more than it was before. This is where interest rates actually work in your favor! Take advantage of it!

With these rising interest rates, it’s time to get rid of your consumer debt for good and make saving a priority. Financial Peace University is the proven plan you need to take control of your money!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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