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Unemployment Is Down, but It Might Make Your Debt More Expensive

A new report from the U.S. Bureau of Labor Statistics shows that 235,000 people were added to the payroll in February. In addition, the unemployment rate decreased to 4.7 percent.

This change isn’t drastically different from January’s 4.8 percent unemployment rate. However, the positive momentum could be just the stimulus the Federal Reserve needs to move forward with another interest rate increase. Here’s what that could mean for your finances.

The unemployment rate is on the decline

While a decrease in the unemployment rate is great news, it’s a trend that’s been ongoing. According to The New York Times, the U.S. is at a 44-year low for jobless claims. This low puts us near “full employment,” something described as when “everyone who wants a job at the going rate can find one.”

While the unemployment rate has declined, hourly wages rose six cents to $26.09 in February. That follows the growth of the past year, a time in which hourly earnings increased by a total of 2.8 percent.

unemployment rate

Source: U.S. Bureau of Labor Statistics

 

The Federal Reserve poised to increase interest rates

All this is good news for the Federal Reserve, which has its Federal Open Market Committee meeting next week. The Fed will formally discuss the possibility of increasing its benchmark rate.

According to MarketWatch, “The central bank was prepared to raise interest rates at the March meeting unless something unexpected happened.” Their fears? That something might happen to show that the economy isn’t strong enough to withstand an increase in the federal funds rate.

But the strong unemployment report coupled with hourly earnings on the rise might alleviate any concerns the Federal Reserve had. When more people are gainfully employed and earning money, they can handle higher interest rates and the effects on their debt.

The Federal Reserve already had a plan to potentially increase its benchmark rate three times this year. Their main motivation: winning the battle against inflation.

In a down economy, decreasing the federal funds rate gives consumers breathing room to repay their debt. When borrowing money is inexpensive, people are more apt to borrow and make big purchases. More money moves through the economy, which, in theory, means more growth.

In an up economy, increasing interest rates can control inflation and encourage people to save. When it’s more expensive to borrow money, people spend less and the demand for goods drops. That ensures that the dollar remains strong and helps consumers earn more money on their savings.

How rising interest rates could affect you

Depending on the specifics of your financial situation, rising interest rates could help or hurt you.

If you have fixed-rate loans or you have money in savings, a bump in interest rates is actually good news for you. Higher interest rates mean you could earn more on your savings account. If you have fixed-rate loans, your interest rates can’t be increased — thus protecting you from a sudden jump in your monthly payment.

But if you’re carrying debt with a variable interest rate, you’ll end up paying more each month if your interest is increased. To prevent this, you might want to consider refinancing to a fixed rate.

Most credit card issuers also have the ability to raise your interest rate, so this type of debt may get more expensive as well.

If you think your credit card interest will increase, you can pay off your debt with a consolidation loan or balance transfer credit card. The first option gives you a fixed rate and fixed payoff date. The second makes you eligible for no or low interest for anywhere between six and 24 months.

If you’re concerned about the Federal Reserve raising interest rates, form a plan now. The Fed will be meeting again throughout the year to potentially increase its benchmark rate again. Better to take control of your loans now before you get stuck with a bill you can’t pay later.

Want more ways to deal with increasing interest rates? Try these 6 steps.

Interested in refinancing student loans?

Here are the top 6 lenders of 2017!

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