When interest rates go up, your monthly payments on any kind of loan or line of credit also increase. If you have high-interest debt accounts like a credit card, auto loan or personal line of credit, that can be a big problem. So how can you manage the impact when the interest rate goes up? The first answer is simple: pay down your balance as quickly as possible so that you’re not dealing with a huge balance once the new rates take effect. There are still ways to manage the impact of rising interest rates on your personal financial statement, even if you cannot pay off your high-interest debt immediately. Let’s look at some strategies for managing your debt when interest rates go up.
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Pay any excess funds to your highest-interest debt account.
The first and easiest way to manage your debt when interest rates go up is to make sure you’re paying down any high-interest debt as quickly as possible — even if you can’t pay it off in full. Using the example of a credit card with a balance of 16% interest and an auto loan at 4%, you may be better off paying any extra money to the credit card rather than to the auto loan, even though you will owe more in the long run. This strategy will both reduce your interest expense and help you to avoid further debt. This approach can be especially helpful if you’re dealing with a large balance on a line of credit or have a high-interest credit card that has a large minimum payment.
Change your repayment strategy for any remaining balance.
If you can’t pay off your high-interest debt in full, you may be able to reduce the amount of interest by switching to a longer repayment term. A longer repayment term will reduce your monthly payments, but it will also increase the amount of interest you pay over the long run. If you have a credit card balance, for example, you can change your payment to pay only the minimum amount due for a longer period of time. A longer repayment term will reduce your monthly payments, which will help you to keep up with your debt repayment.
Consolidation and refinancing
Having one of the lower-interest lines of credit may allow you to lower your interest rate on a high-interest credit card balance or other unsecured debt. Keep in mind that refinancing may increase the amount of debt you have on your books, but it could help you to pay off your debt more quickly and at a lower cost. If you have a high-interest student loan, you may be able to lower your interest rate by refinancing that debt to a lower-interest term.
Negotiate a lower interest rate with your lender.
When interest rates go up, many lenders will offer existing customers a lower interest rate. If you have a personal line of credit or credit card debt, ask your lender if they will reduce your interest rate to remain competitive in the marketplace.
Change your repayment schedule
Reducing your monthly payments on a high-interest debt account might be possible if you extend the repayment period. This strategy will lower your monthly payments but will increase the total amount of interest you pay over the life of the debt.
Borrow from your IRA and the Roth IRA
If you’re struggling to manage your debt when interest rates go up, you might want to consider borrowing from your IRA or Roth IRA. Borrowing from your IRA or Roth IRA will have tax implications, but it could be a smart way to get a quick injection of cash without having to pay interest on a high-interest debt account. Only use this strategy if all else fails. You should also be sure to repay the loan as quickly as possible to avoid any long-term impact on your retirement savings.
Conclusion
Your monthly payments on any kind of debt account will also go up when interest rates go up. You can mitigate the impact on your personal financial situation in a number of ways, ranging from paying down your balance as quickly as possible to changing your repayment strategy for any remaining balance. These few simple strategies can help you keep your monthly payments as low as possible if you are aware of the impact of rising interest rates on your debt accounts.
