How Rising Interest Rates Impact You in 2023

Breaking news — rising interest rates affect millennials, so what do you do now?

As the Federal Reserve continues to increase its benchmark interest rate, it can affect the cost of borrowing for mortgages, auto loans, and credit cards, all of which can impact the financial decisions that millennials make.

In this article, we will explore the ways in which rising interest rates can affect millennials and what they can do to mitigate the impact.

From saving for a down payment on a home to paying off student loans, this article will provide valuable insights for millennials looking to understand the impact of rising interest rates on their finances.

What Millennials Need to Know About the Federal Interest Rate Hikes

Millennials should be aware that a federal interest rate hike can have a direct impact on their finances.

When the Federal Reserve raises interest rates, it can make borrowing more expensive, which can affect everything from credit card balances to mortgage payments.

It can also make it more difficult for millennials to qualify for loans and mortgages.

Additionally, a rise in interest rates can cause the stock market to become more volatile, which could impact millennials who have investments in the stock market.

It's important for millennials to stay informed about the direction of interest rates and how it might affect their personal finances.

Here are some key points that Millennials should keep in mind about the recent federal interest rate increase:

• Rising interest rates signal optimism. In the world of macro-economics, when interest rates rise, it is actually a sign that the Fed – which oversees Federal Reserve Banks and is key to the implementation of U.S. monetary policy – has increased optimism about the nation’s economy. 
• Rates are still historically low. Keep in mind that there have only been a few rate increases in the past decade and since the 2008 financial crisis. The fact is that even with an incremental bump, current interest rates are still very low, and are close to rock-bottom historical levels.

How Interest Rates Impact Baby Boomers vs Millennials

Most baby boomers, who are likely to be retired or preparing to retire, will benefit as interest rates rise.

For baby boomers, rising interest rates may have a positive impact on their finances. For example, if they have money saved in a savings account, money market account, or CD, they may see a higher return on their investment as interest rates increase.

Additionally, if they are looking to sell their homes, they may be able to get a higher price for them as interest rates rise, making mortgages more expensive and therefore making their home look more affordable.

For millennials, however, rising interest rates may have a negative impact on their finances. For example, if they are trying to buy a home, they may find it more difficult to qualify for a mortgage as interest rates rise, making the cost of borrowing more expensive.

Additionally, if they have student loans or credit card debt, they may find it more difficult to pay off these debts as interest rates rise, making the cost of borrowing more expensive.

In general, baby boomers may be more likely to benefit from rising interest rates if they are already homeowners and have savings or investments, whereas millennials may be more likely to be negatively affected by rising interest rates as they are more likely to be in the process of buying a home or paying off student loans and credit card debt.

What Causes Interest Rates to Rise?

Interest rates are determined by a variety of factors, but the most significant factor is the actions of a country's central bank, in this case, the Federal Reserve. The Federal Reserve can raise or lower interest rates in order to influence the overall health of the economy.

There are a few factors that can cause the Federal Reserve to raise interest rates:

1. Inflation: If inflation is rising too quickly, the Federal Reserve may raise interest rates to help slow down the economy and keep inflation in check.
2. Economic growth: If the economy is growing too quickly, the Federal Reserve may raise interest rates to slow down the economy and prevent it from overheating.
3. Unemployment: If unemployment is low, the Federal Reserve may raise interest rates to keep wages and prices from rising too quickly.
4. International factors: If there's an economic crisis or instability in other countries, the Federal Reserve may raise interest rates to prevent a similar crisis from happening in the US.
5. Monetary policy: The Federal Reserve's monetary policy may change based on the economic conditions, which may be influenced by a combination of the above factors.

It's also worth noting that interest rates can also be influenced by external factors like global economic conditions, commodity prices, and political events.

What About Student Loans—Will My Rate Increase?

Interest rates on student loans are typically fixed, meaning they do not change over the life of the loan.

However, the interest rates on new student loans are determined by the government and are based on the 10-year Treasury note rate at the time the loan is issued.

As a result, if the Treasury rates are rising, the interest rates on new student loans will also increase. This means that when the Federal Reserve raises its benchmark interest rate, it can cause the Treasury rates to increase as well, which can lead to higher interest rates on new student loans.

It's worth noting that not all student loans are issued by government, some are issued by private lenders and their interest rates are determined by the market and the creditworthiness of the borrower, so the interest rate could be affected by the general trend of interest rate.

So, to sum up, rising interest rates can cause the interest rates on new student loans to increase, making the cost of borrowing more expensive for students.

What Rising Interest Rates Mean for Mortgages

When interest rates rise, it can mean that the cost of borrowing money for a mortgage will also increase. This means that mortgage rates will also rise, making it more expensive for people to borrow money to purchase a home. As a result, some potential homebuyers may be priced out of the market, and those who are able to get a mortgage may have to pay more in interest over the life of the loan.

Additionally, as interest rates rise, the value of existing fixed-rate mortgages will decrease, which means that homeowners with these types of mortgages may find it more difficult to refinance or sell their homes.

However, it's worth noting that rising interest rates do not necessarily mean that the housing market will suffer. It depends on how much the interest rates will rise and the overall economic conditions. A steady and moderate increase in interest rates can be a sign of a healthy economy, which can be good for the housing market in the long run. Additionally, if the economy is strong, more people may be able to afford higher mortgage rates and continue to buy homes.

It's also worth noting that there are different types of mortgages, like adjustable rate mortgages (ARMs) which interest rate may change periodically based on the market conditions. While these types of mortgages can offer lower rates initially, they can become more expensive over time if interest rates rise.

What About Auto Loans—Will My Rate Increase?

Auto loan rates are expected to inch up in 2023, mirroring the federal interest rate hike. Still, even if the Fed continues with its planned additional rate increases before year’s end, industry analysts expect the effect on Millennials and others who take out auto loans to be relatively minor. 

However, yes, rising interest rates will likely affect auto loans. When interest rates increase, it becomes more expensive for borrowers to take out loans, and as a result, they may be less likely to do so.

Additionally, the cost of borrowing for auto loans may also increase, making them more expensive for borrowers who do take out loans. This can lead to a decrease in auto sales and a decrease in the overall demand for auto loans.

Credit Cards—Will My Interest Rate Hike Up?

Yes, rising interest rates can affect credit card borrowing as well. Most credit card companies determine their interest rates based on the prime rate, which is an interest rate that banks charge their most creditworthy customers.

When the Federal Reserve raises its benchmark interest rate, it may cause the prime rate to increase as well, which could lead to higher interest rates on credit cards.

As a result, the cost of borrowing on credit cards could increase for consumers, and this may cause some to reduce their credit card usage or pay off their balances more quickly to avoid accruing high-interest charges.

Why Rising Interest Rates Can Be a Good Thing

Rising interest rates can a positive thing for you. If you are an active investor or have a high-yield savings account than rising interest rates means your rate of return on these accounts will go up as well.

Rising interest rates can be a good thing for other several reasons:

1. Economic growth: Rising interest rates can indicate that the economy is growing and that inflation is under control. This can lead to increased consumer confidence and spending, which can further boost economic growth.
2. Higher returns on savings: As interest rates rise, savers can earn a higher return on their savings accounts and other fixed-income investments. This can be especially beneficial for retirees who rely on their savings to supplement their income.
3. Control inflation: Rising interest rates can help control inflation by making borrowing more expensive. This can discourage borrowing and spending, which can help keep prices stable.
4. Reduce the risk of asset bubbles: When interest rates are low, it can be easy for investors to borrow money at a low cost, leading to speculation and driving up asset prices, such as stocks, real estate, and art. Rising interest rates can make borrowing more expensive and reduce speculation, thereby reducing the risk of asset bubbles.
5. Monetary policy: Rising interest rates are a tool that central banks use to control inflation and stabilize the economy. The Federal Reserve raises interest rates to slow down an overheating economy and lower interest rates to stimulate growth in a weak economy.

It's worth noting that rising interest rates can also have negative impacts, such as making borrowing more expensive, slowing down the housing market, and making it harder for some businesses to borrow money. But overall, when interest rates are rising, it can be a sign that the economy is improving and it can be beneficial for those who are saving and investing.

What Can I Do About Rising Interest Rates?

Here are a few things you can do to mitigate the impact of rising interest rates:

1. Review your debt: Look at your current debt and see how rising interest rates may affect your monthly payments. Prioritize paying off high-interest debt, such as credit card balances and personal loans, as soon as possible.
2. Consider fixed-rate loans: If you're planning on taking out a loan, such as a mortgage or car loan, consider a fixed-rate loan. This will ensure that your interest rate and monthly payments will not change, even if interest rates rise.
3. Refinance your mortgage: If you already have a mortgage, consider refinancing to a lower interest rate. This can lower your monthly payments and help you pay off your mortgage faster.
4. Increase your savings: With rising interest rates, your savings account will start to earn more, so consider increasing your contributions to your savings account or other fixed-income investments.
5. Be mindful of your investments: Rising interest rates can affect different investments in different ways, so it's important to be aware of how your investments may be affected and make adjustments accordingly. For example, bond prices tend to fall when interest rates rise, so you may want to consider diversifying your portfolio by adding stocks or other types of investments.
6. Review your budget: Rising interest rates can affect your finances in various ways, so it's important to review your budget and make adjustments as needed. Consider cutting back on unnecessary expenses, increasing your income, or finding ways to reduce your debt.

It's important to keep in mind that interest rate increases can affect everyone differently, so it's always a good idea to consult with a financial advisor or professional to determine the best course of action for your personal financial situation.

The Bottom Line

As you can see, the recent federal interest rate hike will have some effect on Millennials and other consumers in relation to their loans. Continue to make smart financial decisions, and don’t sweat it too much: the impact is likely to be minimal, particularly in the short-term.

You don't have to be a penny pincher but with rising interest rates — you benefit the more have in your online savings account. Take advantage of it — interest rates influence each of our lives in important ways, but depending on your age, the result can be quite different.