Why Raise Rates?

Gone are the days of rock-bottom interest rates spurred by pandemic relief. If your head is spinning from the abrupt increase in rates, you aren’t alone. While the country is still reeling from the devastation of COVID cases, many Americans are being impacted by the sudden rate hike introduced in June. Let’s take a deep dive into why interest rates need to change and how you should approach your lending needs.

COVID’s widespread reach affected virtually every aspect of our lives.  At the height of the pandemic, the Fed dropped interest rates to near-zero to soften the blow to the economy. The hope was that lower rates would encourage consumers to borrow. Of course, drastically lower rates meant that demand skyrocketed. Mortgage lenders found themselves flooded with requests for purchases and refinances. Car dealers were lacking inventory thanks to the combined effects of increased demand and supply chain issues. This out-of-control excessive growth paved the way for inflation and with it, gas prices that clock in at more than $5.00 per gallon and astronomical food costs.

Now, two years later, the Fed is raising rates to quell demand. When money is more expensive to borrow, consumers think twice. The thought behind this move is that the economy needs time to calibrate to more consistent demand. If you were planning to purchase a home or a new vehicle, this rate hike may make you reconsider. That’s not necessarily a bad thing. If you have the luxury of time, waiting out a large purchase until 2023 when rates will hopefully return to a more favorable “normal” is probably best. While there are no guarantees, patience is probably the best route to take.

Rising costs may have borrowers sour, but it’s not all doom and gloom. Savings rates – particularly for long-term savings – are at a pandemic-high, and have the potential to grow higher throughout this year as the Fed expects to continue to raise rates as needed. If you can save money on large purchases (or even everyday purchases – every cent adds up), you can reap the rewards. Take a look at our Share Certificates, for instance. After the rate drop of 2020, savings rates were nothing to write home about. Now, with the increase, savers can lock in rates over 2.00% APY on certificates ranging from 15 months through five years. 

I know I said that consumers who have the luxury of time can (and should) hold off on borrowing until the market evens out, but what if you really have no choice? Unfortunately, renters are facing increases in their rent that may force them to alternative living arrangements, and we all know that cars do not last forever. There will be instances where you have to borrow in order to live. In these situations, I would suggest shopping around. As always, your credit union should be your first stop. The rates at a credit union are almost always lower than the competition, and due to the member-focused mission of a credit union, your best interests will always be in the forefront. In other words, if our rate is not going to give you the best deal, we will tell you so you can make the most financially sound decision.

For mortgage lending, it may be best to approach the process with the knowledge that you are committing to the house, not necessarily the loan terms. Homes can (and should when appropriate) be refinanced to save money. Lenders will offer adjustable-rate mortgages (ARMs) with varying terms. Each of these options should be considered when shopping for your mortgage. Do your research because not all lenders offer the same options. If you are planning to stay in your new home for many years, committing to a higher rate for the short term may be your best solution.

One last reminder…interest rates affect ALL financial products. Don’t forget that many credit card companies offer variable-rate cards. While that is fine in a low-rate environment, it is not what you want now that the rates have gone up. If you are still paying on a variable-rate card, make the switch to a fixed-rate card, especially if you come across one with a balance transfer special. It should be said that a balance transfer fee is even something that can be overlooked in a volatile market like this one – as long as it makes sense in the long run. Of course, there is no need to worry about any balance transfer fee if you switch to our VISA Rewards Credit Card – it’s always free. Save where you can because even higher rates are looming.

The added perk to making the switch to our card is you’ll earn Rewards Points on every single purchase, including 4X the points per dollar spent at gas stations, 3X the points per dollar spent on restaurant and travel purchases, and 2X the points per dollar spent at grocery stores, superstores, and club stores. I won’t even mention that there’s no annual fee. I don’t know about you, but if I have to spend more on gas and groceries, I want to earn something for it.

Did you have anything to add to this discussion? I want to hear from you! Leave a comment below or email me.

Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that help consumers reach and maintain financial security and start living the life they’ve always wanted.