Interest Rates

 

Written By Ellise Walsh

Tue 3/8/2005 10:38 AM

Interest rates are one aspect of the financial world that affects just about everybody.
The direction of interest rates determines everything from the monthly payment on your
mortgage to the interest rate on your credit card. On the other side of the ledger,
interest rates affect the money you generate on your checking , savings or money market
account. Retirees living on the proceeds of fixed annuities or bank certificates of
deposits are also affected when interest rates rise or fall.

Unfortunately, predicting the future direction of interest rates is one of the hardest
things to do, even for experienced financial professionals. You can study the trends to
help give you a clue, but as they say, interest rates will do what interest rates will do.

The best way for the consumer to play the interest rate game is to shop around for the
most favorable rates, both on loans and on the savings and investments. Banks do try to
compete with one another, and interest rates on loans will vary from bank to bank.
Interest rates on savings instruments will also vary from place to place, so it definitely
pays to shop around.

When looking for a loan, the interest rates you pay will also be affected by your personal
credit rating. A bad credit rating can add many points to your interest rate,
while a clean credit report can ensure you qualify for the lowest interest rate available. Therefore, getting a copy of your credit report and checking it carefully for errors is a vital step in keeping the interest rates you pay on loans as low as possible.

There is not a lot you can do to obtain an appreciably higher interest rate on your savings
or checking account, however. In a low interest rate environment such as the one we are
currently in, there is not much a saver can do to boost risk while maintaining the safe
investment they need. Sometimes internet only banks will offer higher yields on their
savings account; that is one thing you can do to boost your yield. Other than that,
shopping around is the best way to find the best interest rate.

It is best not to try to predict the direction of interest rates. Even experts have
problems with this esoteric study, and guessing wrong could prove to be very costly.
For instance, if you are buying a home, you may be tempted to wait it out hoping for
lower interest rates by the closing date. However, if interest rates go against you,
you could end up with a much higher interest rate (and consequently a much higher monthly
mortgage payment) than you bargained for when you selected your home. This could leave
you uncomfortably stretched at the end of the month or even unable to make your monthly
payments.

It is true that interest rates are important to every consumer. Make sure that you shop
around for the best interest rate whether you are borrowing money from the bank for a loan
or letting the bank use your money through your savings account. Even a small difference
in the interest rate you pay on your loans can mean a lot of extra money out of your pocket.