How Interest Rates Affect You as a Saver or Borrower



Changes in interest rates impact a majority of people because individuals are generally borrowers or savers. For borrowers, rising interest rates mean more discretionary income is paid to financial institutions in the form of interest expense, on short-term loans such as credit card debt. These added monthly expenses leave less money to be spent on discretionary items.  

Interest rates on credit cards vary significantly. In addition, there are complex fees, minimal repayment formulas, and numerous reward plans. For individuals who carry monthly balances, the primary focus needs to be awareness of the card's APR which is generally at the bottom of the credit card statement. APR is calculated daily, so it is beneficial to pay off as much of the balance each month as possible. Also whenever possible, avoid using your credit card like an ATM to receive cash. Transactions that involve receiving cash from a credit card typically involve additional fees for that service.  

For savers, higher interest rates provide additional income in the form of interest. The added income allows savers an opportunity to increase their spending, decrease other long-term liabilities such as car payments or home loans, or save more for the future. For savers, extra income can be earned by taking a portion of their emergency fund and investing it into a certificate of deposit (CD) which can be purchased at a bank, credit union, or other financial institution.  

Savers such be aware that interest rates offered on CDs can significantly vary from one financial institution to another. Comparing rates on the internet is a great way to compare rates. Make sure that you compare CDs with the same maturity length because these instruments have different term lengths ranging from 3 months to several years. Certificates of deposit are generally insured through the FDIC for up to $250,000 per depositor.  

The downside of certificates of deposit is that each financial institution has rules surrounding opening a CD. Some have minimum deposit rules and others require additional financial relationships such as a checking account at the institution. If you are planning to open a CD, beware that some are callable which means they can be terminated by the issuing financial institution after a certain time. In addition, nearly all CDs have early withdrawal penalties if you need your money back before the CD term ends.  


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