From 2009 to 2022, it was a great time to borrow money.

Low interest rates during that period lowered the cost of carrying debt. This gave households more money to spend on other purchases, including homes, vehicles, furniture, and a good deal more.

But big changes began to take place in 2022.

As part of its strategy to fight soaring inflation, the Federal Reserve began raising interest rates. From March 2022 through May 2023, interest rates jumped almost 5%.[1]

“Few anticipated these kinds of increases,” offers Peter McCarthy, PNC Head of Mortgage. “We’ve never seen rates increase this much, this quickly. This had a ripple effect on purchasing decisions by many prospective homebuyers, because higher interest rates ultimately have lowered the threshold of what may be affordable for them.”

While impact to home purchases have been the most visible effect, credit card holders have faced similar pressure. Lakhbir Lamba, PNC’s Head of Retail Lending, spells out how higher interest rates have affected credit card holders.

“Simply put, higher interest rates mean consumers pay more to service their debt, with the potential of carrying over more of their balances, too. And this doesn’t just affect a consumer’s monthly budget. If not managed correctly, these higher balances could increase a consumer’s overall credit utilization and could potentially affect his or her FICO scores.”

Yet, even in the face of higher interest rates, there are financial decisions you can make to help reduce their impact.

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It begins with rethinking your household debt and adjusting your monthly budget accordingly.

While there is no definitive one-size-fits-all solution for everyone, there are a few simple moves to consider. Chances are, at least one or more of these could have a positive impact on your overall budget in the months ahead.

Know Your Overall Financial Picture

Even before you consider specific strategies to reduce your mortgage or credit card debt, there are some fundamental steps you can take that can give you more confidence as you address the amount of interest you pay. 

  • Know your current credit score. This is always good advice, no matter where current interest rates are. Your credit score affects more than your borrowing ability. It also can determine how high your interest rates will be.
  • Yet credit reports are not infallible. Mistakes in reporting do occur. Discovering and addressing errors in your credit report could potentially raise your credit score, which in turn, could possibly lower your overall interest rates over time.
  • Want to know more? You can request a free copy of your credit report once each year from each of the three consumer reporting agencies — Equifax, Experian and TransUnion — through AnnualCreditReport.com.[2] If you have a PNC credit card, you can access your credit score through PNC Online Banking or the PNC mobile app.
  • If you have the ability, consider paying off what debt you can. Doing so frees up more discretionary income, in turn allowing you to pay down other forms of debt.

Put Your Mortgage To Work

Historically low mortgage rates have influenced the increase in home prices. Low mortgage rates also lowered the barrier to entry for many prospective buyers. At the same time, both the increase in work-from-home during COVID-19 and exploding demand for second or third homes taxed the ability of homebuilders to keep up. This in turn led to a shortage of inventory that caused home prices to soar. This also allowed many homes to amass equity that could be harnessed to serve as a powerful financial tool.

Now that rates have climbed higher, there are any number of possible strategies and mortgage products that could create opportunities to reduce your debt or your mortgage payments. According to McCarthy, “If you have built up equity over the past several years, there are mortgage options that could prove powerful allies when it comes to managing household debt.”

One popular tactic is to borrow against the equity of your home and apply the money to pay down debt, effectively swapping the higher rate of credit cards with the lower rate of a home equity loan or a home equity line of credit.

However, before moving forward with any of these possibilities, it’s important to fully understand the pros and cons of each solution. Further, a mortgage lending professional may have additional strategies well-suited for your unique situation.

According to McCarthy, “Don’t be afraid to educate yourself, ask questions, shop around. The more educated you are as a consumer and the more you know about what’s available, the better it is for you. Don’t feel you must act right away, either. Find a trusted advisor to ensure you’re making the right decision.”

At the same time, despite the headlines, it’s also important to not be alarmed by today’s interest rates. Rates remain desirable compared to previous decades. According to McCarthy, “Rates have gone up to be sure. But, historically speaking, they remain relatively low.”

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Credit Cards

If you’re a cardholder and carry a balance on your credit card account from month to month, then you’re already seeing the effect of higher interest rates. According to Lamba, “If you carry significant debt on your credit cards, higher interest rates are making their effects felt. Yet some simple strategies might give you breathing room when it comes to making ends meet.” Some steps that Lamba suggests considering include:

  • Pay down your cards as much as possible. That way, you minimize the amount of interest you accrue.
  • Have multiple credit cards with balances? Pay off cards charging the highest interest rates first. To learn what your current rates are, look no further than your monthly statements.
  • Likewise, if it proves necessary to use credit cards, it’s recommended you use the card with the lowest interest rate.
  • As an incentive to open an account, many credit cards will charge significantly lower interest rates if you make a balance transfer to the new card. In fact, there are cards that offer 0% interest for an introductory period that often ranges from 18-21 months. However, always be mindful of the offer period. Also, please note that there is usually a transfer fee that’s calculated as a percentage of the balance.
  • Consider Cash Back credit cards.
  • Always make at least your minimum monthly payment by the due date each month. Failure to do so will affect your credit record, potentially hurting the ability to secure future loans.
  • Finally, if you are facing problems making the minimum payment, an important step is to contact your credit card company. Some lenders will offer a 3- or 6-month payment pause or a reduction in your interest rate for a limited time.[3]

One other thought on credit cards: Keep your credit card accounts open, even if you pay them off. According to Lamba, this can help with maintaining a higher credit score. “Keeping card accounts open helps your Credit Utilization Rate. This allows you to use your cards to build your credit over the longer term. However, if you’re not using a card, it is important to lock it to help protect against unauthorized charges from sneaking onto it when you aren’t paying attention.”

These are just a few strategies to help keep the pressure off when it comes to rising interest rates. To learn more, contact us at PNC today or visit PNC.com. With the right planning and the right expertise behind you, you could be saving on your monthly mortgage and credit card payments.

Personal Credit Cards: Apply Online & Compare Offers (pnc.com)