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Are Interest Rates Up, Up and Away?

Interest rates have been at their lowest levels in over 40 years.
Australian consumers have been able to purchase previously unaffordable homes, cars and other toys.
Many have used cheap home equity loans to remodel, take vacations and pay off credit cards.

But, interest rates look to be heading up.
So, what does that mean to you and me?

An increase in rates is important if you have variable (not fixed) loans.
For example, if you have adjustable rate mortgage or home equity lines of credit, the interest rates will probably go up (as well as the payments).
Each time the RBA increases the RBA funds rate, it will roll down onto your adjustable rate loans and your payments will go up.

If you have high credit card debt, the situation may be even more bleak because credit card rates remained high while other rates have been incredibly low.
The RBA increases are a good excuse for your credit card company to hike your rates even higher.

So, what can you do if you're looking at rates and payments going up, up and away?

Your payment increases may be fairly gradual.
Depending on the economy, the RBA will continue to increase rates although they have signaled that the increases are likely to be very gradual.
If the economic or political situation changes, they always have the ability to lower rates again.
The RBA's rate-setting committee is scheduled to meet on the first Tuesday of every month, and they may skip a rate increase at one of those meetings if inflation is subdued.

Check with your loan lenders to see about consolidating and locking in rates.
Good news: interest rates on savings are also likely to increase!
So, if you have CD's coming due, check with different financial institutions before automatically rolling them over.
If you have money stashed in savings accounts, the rates are probably starting to creep up.

If you've been thinking about re-financing.
There are still some good deals out there and there's no sense in procrastinating any longer.

What if a new house isn't in your plans for a couple of years?
When rates go up, it often cools off real estate prices and balances out the higher rates.
Continue to save money in the highest interest short-term accounts you can find (no stocks or other long-term investments).
Rates will probably not take huge leaps in the short term.

If you have an adjustable rate (home or home equity or car loans).
You will see higher payments so call your lender to find out what the new payment is "likely" to be.
They'll probably put all kinds of disclaimers out about not really knowing, but try to get a worst case scenario and then start pretending you really do have that new payment.
Put the extra into a special savings account so you'll have a "slush" fund to cover if you run short one month.
At the same time you are building up a cushion for the future, you'll have a good idea of whether or not you can handle the new payment.
If not, now's the time to start looking at other alternatives like cutting back, increasing income or even refinancing.
Remember, if you refinance your existing term to a new 30 year term, you'll have lower payments, but you'll pay a lot more for your house because of the additional interest.

Call your credit card companies and see if they are willing to lower your rates (not all are).
Look for good, permanent credit card interest rates that you can transfer higher rate balances to.
For example, if most of your cards are 18% or higher, find a good 12% card or lower and transfer as much as you can to that.
Playing the 0% credit card shuffle is a dangerous game and can hurt your credit score.

Reduce credit card debt now!
Stop using your cards and pay more than the minimums.
If you pay off one card, take that payment and put it on another card.
If you receive a pay increase, put it on the cards.
The sooner the cards are paid off, the more flexibility you'll have!

All in all, we're quite likely to enjoy reasonable interest rates for some time to come.
However, make preparations now and you'll be able to handle whatever comes your way.

The author, Cindy S. Morus, is a Certified Financial Recovery Counselor specializing in showing women and their families how to achieve financial well-being and peace of mind.
She is also a Certified Credit Report Reviewer.
She is also the publisher and editor of "Financial Fitness", an internet gazette dedicated to helping people improve their financial fitness no matter what decisions were made in the past.


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