Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up. For illustrative purposes, a graph of the 30 year fixed mortgage rate shows that we have gone a long way since the 1980s when the rate was upwards of 17.5%. (Source: Yahoo Finance)
The Federal Reserve has maintained the interest rates low in an effort to stimulate the economy by discouraging saving and encouraging borrowing Chairman Ben Bernanke said last month that while the U.S. economy has improved, it still needs support from the Fed to help lower unemployment. Bernanke says that short-term interest rates will stay near zero until unemployment falls to 6.5 percent. Forecasters expect that won’t happen sooner than 2015. (Source: NPR News)
Do you feel like you should be doing something to take advantage of the record low interest rates? Probably.
Whether you want to save, spend or invest, consider your options and choose the strategies that best suit your particular financial circumstances. Here are five tips for low interest rates periods:
- Consolidate debt. With interest rates at historic lows, it makes sense to consolidate debt into one low-interest loan. For example, if you have outstanding balances on several credit cards, consider transferring those balances to one credit card with the lowest interest rate. If you qualify, it may be a good time to apply for a home equity line of credit to consolidate debt or make a home improvement.
- Shop around for credit cards with the best interest rates. You may be able to get one with better terms than the one you are currently using. Or, ask your credit card issuer to lower your interest rate to make it more competitive.
- Make large purchases now. If you’ve been thinking of making a major purchase like a house or a car, today’s low-interest rates make it a good time to finance big-ticket items. However, make sure you have a good credit record and can pay off the loan before applying.
- Order a free copy of your credit report. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. If your score is lower than you’d like, pay down your balances and pay bills on time to raise your score. Read more about What to do if you are a victim of identity theft.
- Keep saving. Just because standard savings accounts aren’t paying a lot of interest now doesn’t mean you should stop saving for your future. Your savings will still accrue, you’ll be less likely to spend it and you know it will be safe. If you can afford to lock up your money for a while, longer-term Certificates of Deposit (CDs) typically pay the highest interest rates. Specifically, Market Linked CDs are an extremely effective and popular solution as they are the only financial product that combines the guaranteed return of your principal and the protection of FDIC Insurance with the potential to earn reasonable rates of return.
In conclusion, although interest rates are at historic lows, it is important to ensure that whatever your strategy is, it makes sense in your particular situation. It’s probably not a great idea to buy an overpriced home now just because mortgage rates are low. Neither is it a good idea to acquire more debt just because it is cheaper to do so.
In any economic environment, the strategy that will ultimately bring you closer to financial freedom is one that focuses on debt elimination and creating tax-free income.