Interest Rates- Good vs Evil?

Interest rates make the financial world go around!  These are unique times as interest rates have doubled this calendar year. 

As a youngster, did you ever throw a rock into a lake to see how the ripples get wider and wider until you can no longer see them?  This is what happens with interest rate changes as their ripple effects run further and wider than the eye can see. 

The Federal Open Market Committee, or FOMC, is the Federal Reserve’s monetary policymaking body.  It is responsible for the formulation of a policy designed to promote stable prices and economic growth.  Simply put, the FOMC manages the nation’s money supply!  The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings (usually every six weeks) during the year. 

When the Federal Reserve raises interest rates, this increase influences almost all the borrowing costs throughout the economy. 

The Good News is:

  1. Bank savings accounts, money markets, and CDs (Certificates of Deposit where interest is taxable) will pay a higher interest rate, however,  it is taxable whether funds are withdrawn or not.
  2. Fixed Annuities (Issued by Insurance Companies that can return 1% higher than bank CDs) will pay a higher interest rate that is tax-deferred.

The Bad News is:

  1. The cost to borrow money has been skyrocketing.
  2. This has triggered major increases in mortgage rates, some student loans, and worst of all, credit card interest rates.  For those who do NOT pay off monthly credit card charges, in some cases interest rates now exceed 30%!

According to the Federal Reserve Bank of New York, the total U.S. credit card debt has reached an astronomical $930 billion!  Households have increased debt at the fastest pace seen in 15 years due to hefty increases in credit card usage and mortgage balances.

I recently had 2 clients with credit card interest rate issues where it made sense to advise them to cash out their existing expensive whole life insurance policies, replacing them with inexpensive term insurance policies, and using a portion of the influx of cash to pay off their existing credit card debt.

If ever there was a time to take action, it is NOW! For those in a similar credit card balance carryover situation, doing nothing and drowning in debt with your monthly minimums increasing can be financially disastrous.

My Lucky 7 suggestions for those that are feeling the credit card rate increase crunch in the short term:

  1. Have Holiday Spending Limits: Have a maximum dollar amount you are willing to spend per person. STOP when you hit your spending limit!
  2. Consider a Secret Santa Type strategy: For those that celebrate Christmas, a “Secret Santa” means your family picks 1 person (out of a hat) for whom to buy presents with a pre-set spending limit/cap.
  3. Try Using Gift Cards: This way, when the money is gone, it’s gone!
  4. Avoid Retail Discount Credit Cards:  When you are at the retail counter, that new store credit card looks great because you get an additional discount on the item you are purchasing.  Those savings can get eaten up tenfold by paying 30+% interest on that store credit card balance the following month(s).
  5. Consider Debt Consolidation Programs:  There are banks and other lending institutions that have “loan consolidation programs.”  This allows you to combine your debt and lock in a lower interest rate to help you pay down the balance.
  6. Negotiate: There are banks that will allow you to negotiate debt and/or freeze a card until it is paid down to zero.  Crying poverty can work. 
  7. Curtail Your Spending:  If you cannot pay off the item in full within 30 days, don’t buy it!

Individuals feeling the “credit interest rate crunch” are not alone.  This is happening on a macro level as there is a looming default risk crisis internationally.  There are small poor nations that owe big $$$$ to big nations.  The perfect storm of rapid inflation, slowing growth, a stronger dollar, and rapidly rising interest rates have some nations teetering on bankruptcy.

To give you an example, Sri Lanka’s Central Bank negotiated a “barter deal” to pay for Iranian oil with tea leaves! 

There is a saying that I always liked, “Action Diffuses Anxiety!”  If you are in this situation, take action and you will start feeling better almost immediately.  Doing nothing and “kicking the can down the road” will only exacerbate the problem later!