With the rise in interest rates over the past couple of months, a lot of people are on edge. The main concern is how your finances will withstand the changing economy? The key to answering this question is understanding the reasoning for rising interest rates and knowing how to react.  

Why are interest rates rising?

The Federal Open Market Committee decides on what the target interest rate is for commercial banks and credit unions. Their goal when they alter rates is to maintain the stability and liquidity of the economy.

As we have seen in 2022 and will continue to see into 2023, interest rates are rising. The goal of the Fed is to slow down the rate of borrowing to stabilize the economy. For the consumer, it becomes more expensive to borrow money. On the other hand, savings rates also increase, so you get more bang for your buck as you put money away.  

How to handle rising interest rates?

As all these adjustments are made, the likelihood of a recession increases. Here are a some ways to protect yourself from any drastic financial changes.

Review your finances

Take the time to look over your finances to see how everything lines up. First, find out what your current savings accounts APY is and shop around for high yielding savings accounts. Now is the time to save; rates are going up on savings accounts, so you have the potential to earn even more.

Next, create a list of your all your current debt. Review whether you have a fixed or variable rate on that debt. If it is variable, the rate could shoot up because of the rising interest rate environment. Try to pay down your variable debt before the rate increases and makes the borrowed money even more expensive.

Finally, look over your monthly budget. Make sure you know which of your expenses are need-based vs. want-based. For example, you need food to eat, but that expense may need to be focused on your grocery bill and not going out to eat. You can make small tweaks on your budget to make sure you are ready for any economic change coming your way.    

Work on boosting credit score

With rising interest rates, you may not want to borrow money, but life continues. Your car could breakdown, or you may need a new water heater. When situations like these happen, you may need a loan to cover the cost. To get the best rate on your loan, focus on having a strong credit score. Financial institutions give the best rates to the most secure borrowers. One way to show you are that borrower is by making your payments on time. Payment history can either make or break 35% of your credit score. Never miss a payment by scheduling automatic payments or setting alarms for when your bills due.     

Another key factor is getting your credit utilization as low as possible. Lenders interpret a low credit utilization as being able to handle the credit you already have without overspending. It is recommended to keep your credit utilization under 30% to help your credit score. These behaviors all impact your credit score and will get you a lower rate on your loan.

Make sure to have an emergency savings

With the potential of a recession, job loss and a lack of hiring may increase. Having an emergency savings ready can prevent you from getting into dire financial trouble. An emergency fund should be liquid and easily accessible. This way, you can get it when the issue arises. Experts recommend having around 6-months’ worth of expenses tucked away so you have time to find another job. It prevents you from having to go into debt on a high-rate loan when you are already struggling.

Look into career opportunities and growth

Your job is what brings in the money that will maintain your financial stability. During a rising rate environment, you want your company to see value in you to increase your job security. Show your commitment to the company by asking what steps you need to take to keep growing. Enhance your skills through different educational opportunities so that your company can rely on you. Plus, your knowledge could lead you to increased earnings which can’t hurt!  

The rising interest rates may seem scary, but you can get through it. Make sure you are on top of your finances and ready to take on the new challenges this environment provides. Looking for financial help? Head to Velocity Community Credit Union for your financial needs!  

Sources: Forbes, CNBC