To make smart decisions about credit, think of borrowing money like “renting” money, and the rent is the interest rate. Currently, renting money is cheap. However, interest rates are going up – and it will be more expensive for you to borrow money. If you aren’t prepared, you could find yourself short of cash.
Interest rates are currently low because of the economic challenges the United States faced in 2008. But keeping the interest rate low is a balancing act. When interest rates are low and the economy is doing poorly, the low-interest rates help people struggling financially to hang on to existing debts like their mortgages.
But when interest rates are low and the economy is doing well, people become willing to take on more debt than they normally would. They’re willing to buy things traditionally thought of as “frills” or “extras” on credit such as new vehicles, renovations and vacations.
As interest rates go, we could have a lot of people that can no longer afford their debts. Because some of the debts are due to buying “extras”, people won’t be able to sell things to pay off the debt (or won’t get out what they put in).
Consider this, on a $200,000 mortgage, a 1% increase in the interest rate will increase the monthly payment by approximately $167. Realistically, interest rates could go up by 3% or more and the payment on your mortgage would increase by $500 per month! An increase of 6% will increase your mortgage payment by $1000 per month!
You can prepare for the interest rate increase about to happen by paying off your debts as quickly as you can. Need a strategy to reduce your debts? Ask Adriann about the snowball method and all-in-one accounts.