6 Ways to Cope With Rising Interest Rates

Written by

Richard Barrington

Updated by

Kristin Marino

Interest rates are rising. After a long stretch of low and fairly stable rates, the last couple years have established a clear trend toward higher interest rates.

This is broader than recent Federal Reserve policy. After all, despite their series of interest rate hikes the Fed does not directly control the rates demanded by lenders or offered by banks to depositors. The trend toward higher interest rates can also be attributed somewhat to an increase in inflation, and simply to a return to more normal rate levels.

Here are some examples of rate increases over the past two years:

Notice in the above chart that while rates are moving upward across the board, the rates that consumers are charged on things like credit cards and mortgages are rising faster than the rates they earn on savings accounts.

This suggests that consumers could have more to lose than they have to gain from a rising rate environment. In order to protect yourself, there are some moves you can make to minimize the cost from rising interest rates and maximize the benefit.

Dealing with rising interest rates

What happens when interest rates rise? The cost of borrowing certainly goes up, as illustrated above, while some investments benefit from rising interest rates. It’s important to minimize high-interest debt and capture the highest return available on investments. Here are six things you should consider doing now:

1. Pay down debt faster
   Low interest rates encourage borrowing, but if you have any variable-rate debt like a credit card balance, it’s likely getting more expensive as rates rise. This is a disadvantageous time to carry a credit card balance, so make it a goal to pay down your debt more quickly than you have done in the past.
2. Shop for new banking products
   When interest rates were stable there was little change in the banking environment, but as rates start to rise it can shake up the competitive landscape. That means different banks may now offer you the best savings account rates or charge you the most reasonable credit card rates. An environment of rapid change makes for a good time to reevaluate your banking relationships.
3. Lock in a mortgage rate
   While rising mortgage rates are blamed for slowing housing market activity, the chart above shows that 30-year mortgage rates have had a fairly mild increase over the past couple years compared to most other rates. It is possible they could have further to rise. From a historical standpoint, mortgage rates are still comparatively low, so this might be a good time to get serious about your home-buying plans.
4. Build a CD ladder
   Building a CD ladder with a series of maturity dates at regular intervals gives you more opportunities to reinvest at higher rates – something that is valuable in a rising rate environment.
5. Shorten bond maturities
   Bond prices fall when rates rise, and long-term bonds are hit the hardest. Moving to shorter-maturity bonds could dampen the negative impact of rising rates.
6. Reduce your equity allocation
   People usually talk about the investment impact of rising rates on bonds, but they also create a challenging environment for stocks. Rising rates can dampen economic growth and lower stock valuations. This might be a good time to rein in your allocation to stocks a little bit.

The recent trend is a departure from the general direction of interest rates over the past three decades, which has been predominantly lower. You may not have much experience with rising interest rates as a consumer or an investor, but the sooner you get ready for them the better you can turn their impact to your advantage.