Good, better, and best practices for all rate environments

While interest rates held steady for at least a decade before the COVID-19 pandemic, the only constant with interest rates since then is that they’ve been on the move — both up and down. When everyone was sent home from work or school to quarantine, rates took a drastically low dip to keep the economy stable. In the post-pandemic world, rates steadily increased for a couple of years to stave off rising inflation.

During extreme interest rate times — low or high — what is the best course of navigation for a savvy consumer? We’ve put together a list of good, better, and best money strategies for both rate environments so you can make the most of whatever rate environment you’re in.

What to do when rates are high

A good move: Pay down high-interest debt. When interest rates are high, it’s crucial to prioritize paying off any high-interest debt, such as credit card balances or personal loans. This will help you save money on interest payments and improve your overall financial health. The key to paying down these debts is to avoid paying minimum payments and apply more money toward your principal balances. If you can obtain a 0% introductory offer for balance transfers, that’s a win! Just remember that opening a new credit card can affect your credit score, so be sure that it makes sense for your financial circumstances before you do so. You’ll also want to make sure to pay off the transferred balance within the 0% interest promotional window, and to consider the added cost of balance transfer fees (if there are any). If you aren’t sure what your best move is, talk to a friendly banker to explore your options.  

Even better move: Explore variable-rate options. When rates are high, it’s worth looking into whether a variable-rate loan or mortgage may be a smart move. This type of loan locks in a rate for 5 to 7 years and then becomes variable depending on the rate environment, at which point you can monitor rates closely and refinance your loan when they ultimately drop again. Be sure to work with your friendly UBT loan expert to figure out what’s right for your situation, because variable-rate options may not make sense for everyone. 

Your best move: Build an emergency fund. In a high-interest rate environment, unexpected expenses can become even more burdensome. It’s wise to establish an emergency fund that covers at least three to six months’ worth of living expenses. This will provide a safety net and help you avoid taking on additional debt.

You can also use higher interest rates to your advantage during these times and earn your own interest. Once you’ve built up your emergency savings and set aside any dollars for planned expenses, consider depositing extra savings into certificates of deposit (CDs) or other interest-bearing savings vehicles when rates are high. Unlike a savings account, the funds in your CD won’t be immediately accessible until the term matures, but if rates are good, even a short-term CD is a great way to passively increase your savings by earning interest.

What to do when rates are low

A good move: Take advantage of low-cost borrowing. When interest rates are low, it may be a good time to consider borrowing for major purchases, such as a home or car. Low rates can result in lower monthly payments and potentially save you money in the long run. If you’ve been needing new appliances or had your eye on a new car, purchasing those items when rates are low is a great money move. The same is obviously true for home shopping.

Even better move: Refinance existing loans. If you have existing loans, such as a mortgage or auto loan, it may be beneficial to explore refinancing options. Lower interest rates can lead to reduced monthly payments or shorter loan terms, helping you save money on interest over time. This was an especially popular option during the pandemic when 14 million mortgages were refinanced in 2020 and 2021 and the average homeowner saw their monthly payment drop by about $220.

Your best move: Invest wisely. In a low-interest rate environment, it’s important to carefully consider your investment strategy. While low rates can stimulate economic growth, they can also result in lower returns on certain investments.* Seek professional advice to ensure your investments align with your financial goals.

At UBT, we can help you navigate rates to your advantage. Don’t hesitate to reach out with any questions you have about interest rates and how they can affect your money!