What Are the Dangers of High Interest Rates?

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Interest rates result from economic performance and, in turn, affect the overall economy. The Federal Reserve, which acts as the nation’s central bank, determines interest rates to maintain stability of the financial system. Banks follow the Federal Reserve's changes to interest rates on what to charge fellow banks and consumers for borrowing money. Higher interest rates have a direct impact on you when you seek a loan or credit cards.

Avoiding Inflation

The Federal Reserve usually raises interest rates if the economy is growing too rapidly. You might think a growing economy sounds good, but quick growth can lead to inflation and the rise in consumer prices. The Fed tries to keep a balance in economic activity.

Easy Borrowing

In a weak economy people tend to hold onto their money and cut down on spending. Lowering interest rates means consumers can get loans or credit cards at lower rates because banks often reduce costs for borrowing. Consumers and businesses benefit from more affordable prices for products and services. On the down side, It also means you won’t get high returns on the money in your deposit accounts.

Pay More Interest

High interest rates can help avoid inflation as banks pay higher rates of return on deposit accounts. However, interest rates for borrowing increase, so you pay more interest on your loan or credit card accounts. Low interest rates on mortgages let more people buy homes. When rates go up suddenly, it can lower real estate property values because fewer people buy homes. So people wind up paying more on their mortgage than if the interest rates were lower.

Consumer Effects

Rising interest rates can hinder businesses, which pay higher costs for borrowing. Companies that use credit to build or expand their business see their costs go up because of high interest rates and then pass the cost on to consumers, so you end up paying more for products and services, whether you have a loan or not.

Credit Card Companies

Credit card companies set their interest rates partly based on prevailing interest rates, but also rely largely on the credit rating of customers. If you have a low credit score because of trouble making payments in the past, you’ll most likely have high interest rates on your credit card. Credit cards are unsecured loans, meaning the creditor can’t seek possessions or property if you don’t pay off the loan.

Debt Risks

High interest rates on your credit card translate to large monthly interest charges added to your balance. If you don’t pay your debt in a timely manner, the accumulated interest charges can increase your debt beyond your ability to pay each month. This puts you in danger of being hounded by collection agencies or facing legal action to pay your debt. You can avoid high interest on your credit cards by paying off your outstanding balance each month to improve your credit rating and to have your interest rates eventually lowered by the card company.