The economy is slowly improving, but consumers may soon bear a new burden: the rising cost of credit. Over the past 30 years, interest rates have dropped dramatically. But the ballooning national debt — now at nearly $1.3 trillion — and the looming threat of inflation have triggered what could be an extended climb for interest rates. What does this mean for the pocketbooks of average Americans? A concise guide:
Overall, what do higher interest rates mean?
Increased interest rates mean the cost of borrowing money goes up, for everyone, from the federal government to individuals. Credit card rates have risen from around 12 percent in late 2008 to more than 14 percent in February, a jump that translates into roughly $200 a year in added interest payments for the typical U.S. household.
Why are interest rates going up?
To offset the possibility of inflation. When prices go up, safe but low-yielding government bonds become less attractive for investors. With inflation prospects returning as the economy improves, major bond investors have been selling off government debt, pushing interest rates up. At the same time, Washington is ending supports that kept rates low through the financial crisis, increasing upward pressure on rates.
How much could interest rates rise?
Between 1 percent and 1.5 percent annually. Thirty-year mortgages, for example, were below 5 percent late last year. They hit 5.31 percent last week, and could go reach 6 percent by the end of the year.
How does this translate into actual dollars?
It depends on the size and term length of the loan. On a 30-year fixed-rate loan, for instance, a 1 percent increase could add as much as 19 percent to the total cost of a home.
How high could interest rates go?
That remains unclear. Fortunately, however, "no one expects rates to return to anything resembling 1981 levels," says Nelson D. Schwartz in The New York Times, when "mortgage rates peaked" at a devastating 18.2 percent.
Is there any other good news?
Yes. Increased interest rates are signs of a strengthening economy, says Chris Farrell in BusinessWeek. And, despite what some believe, "the rise in rates could be good for corporate profits and the stock market." Also, because credit is now much more difficult to obtain, says Jerry Remmers in The Moderate Voice, consumers have already begun to learn "the value of saving, paying off debt and stop using their homes as ATM machines" — necessary practices for surviving an interest rate hike.