If you’ve seen any news over the past year and a half, you probably haven’t missed the incessant headlines about rising interest rates. The rate hikes, which started early last year, came after many years of record-low interest rates, and for many people—especially those carrying high debt loads—they quickly became a cause for concern—or even panic.
Higher interest rates effectively increase the cost of borrowing money, and can extend the length of your repayments if you’ve got a mortgage or a loan. But high interest rates can also work in your favor, if you understand how to make the most of the system. Here’s everything you need to know to get the biggest bang for your interest bucks.
But first, what exactly are interest rates, and why have they increased?
Interest rates are the percentage a lender—like a bank or credit company—charges you to borrow money. When you pay back what you owe, you end up paying back the original amount of your loan, plus interest on that amount.
The interest you’re charged is typically calculated as an annual rate, often called an APY or annual percentage yield. In the U.S., the Federal Reserve sets the prime interest rate, which banks use as a baseline for their own interest rates. When inflation rises, as it has done over the last two years, causing prices and the cost of living to increase, the Federal Reserve raises interest rates to help bring inflation down.
The increased cost of borrowing money typically causes people to spend less, and that decreased demand for products and services can lead to lower inflation rates. Once that happens, the Fed is then able to bring interest rates down, too (though not likely as low as they had been).
Who is affected by rising interest rates?
Anyone with money is affected by rising interest rates. For borrowers, variable rate debt such as a mortgage or a loan that is tied to a lender’s prime rate will be affected by rising interest rates. You’ll essentially be paying more for the privilege of borrowing money, as high interest rates cause more of the repayments to go to interest charges rather than to the principal loan amount. This can extend your repayment plans substantially.
But anyone with savings is also affected by higher interest rates. That’s because some financial institutions offer savings instruments with higher rates, enabling you to make more on the money you have.
How you can benefit from high interest rates
Currently, some financial institutions are offering higher interest rates on savings accounts or on longer-term investments such as bonds and GICs. You may see these called high-yield savings accounts or high-return investments. While the big banks are paying out an average rate of 0.42% interest on their savings accounts, higher interest options can range from 2% to 5% – and that can make a big difference in the money you accumulate!
Of course, at this point, you might be thinking: well, I’d love to save money and earn more interest, but the cost of living is high, and most of my money goes to bills and bank fees. Fair enough, we get it. Life is expensive right now. That’s why we want to give you—and every American—the kind of leg up you simply won’t get from big banks (whose profits, incidentally, continue to rise).
With higher levels of inflation, and as the cost of living rises, money held in low interest accounts (like those at the big banks) actually loses value over time. Essentially, the same amount of money gets you less of whatever you’re buying, so unless you’re growing your money at a rate higher than inflation, which currently sits at 2.97%, you are effectively losing money.
Having money in a high interest account can really pay off over the long term with the effects of compound interest. Here you can clearly see how a higher interest rate can earn you more in the long run.
Grit’s high-interest solution
Grit’s high-interest checking account is a unique option, and a great way to start earning more money. Most high-yield interest accounts are savings accounts, which limit your ability to access your money day-to-day. Grit’s high-interest solution is a checking account, so you can use it for your day-to-day needs, and accumulate interest payments daily.
Most day-to-day checking accounts do not offer a high-interest option, and most banks charge fees that eat away at your balance—often up to $15/month—unless you keep a minimum amount in your account. Grit doesn’t. Our online checking account allows you to make free transactions, access your money whenever needed, accrue interest daily, and even get cash back on your purchases! And at a 3% APY daily interest rate plus cashback on everyday purchases, you’ll be well ahead of many of the other savings options, and will have more money in your pocket.
It’s time to reframe the way you think about interest
Whether you’re getting a loan, financing a purchase or saving for a rainy day, it’s time to think about interest a little differently. If you can minimize the amount of interest you pay, that will become extra money in your pocket. Consider that a credit card might charge you 20% interest or higher on your balance, meaning that $100 pair of shoes you bought could cost you a whole lot more depending on how long you take to pay off your balance.
It’s time to find the lowest interest rates possible when it comes to borrowing money, and higher rates and cashback options when you’re saving. Use your money to make more money. We’re here to help you make it happen. Sign up today.
