Interest rates are an important factor in your financial decisions – they determine how much it costs to borrow and how much you can earn on savings and investments. Understanding how interest rates affect you and your money can help you make smarter financial decisions.
Borrowing costs increase when interest rates rise. This may lead to higher monthly payments on credit card balances, car loans and mortgages. The good news is that by shopping around and negotiating with lenders, you can often find lower interest rates than what your bank or other lender offers.
High interest rates discourage borrowing and spending by households and businesses. This can slow the economy and contribute to a recession. On the other hand, low interest rates encourage borrowing and stimulate economic activity.
When interest rates rise, it becomes more expensive to buy goods and services, which can reduce consumer spending and may cause the stock market to decline. The Federal Reserve sets interest rates to achieve its monetary policy mandate of promoting maximum employment and stable prices.
There are many factors that influence interest rates, including the state of the economy and how much borrowers are willing to pay for money borrowed by others. Personal factors also play a role. For example, banks and other lenders may consider your FICO credit score when deciding whether to lend you money. They may also look at your bank statements to assess your creditworthiness and decide what rate to charge you for a loan or line of credit.
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