Interest rates are involved in most formal lending or borrowing transactions, whether it’s a mortgage, the charge on your credit card balance, or the growth of your retirement savings. Understanding how they work can help you make better choices about borrowing and saving.
The rate of interest measures the price a borrower pays to a lender for the use of resources that will be available at a future date. That’s because money has less value in the future than it does today, so if you want something now, you will have to pay more for it in the form of higher interest rates.
When you’re shopping for loans and credit cards, the interest rate is listed on the agreement or in your online account. It may be fixed, meaning it will not change over the life of the loan or credit card, or it can be variable based on fluctuations in the economy. Variable rates are often indicated by a (V) after the percentage.
The factors that influence the dynamics of interest rates are complex and diverse. These include a lender’s or creditor’s risk tolerance, your income level and other financial circumstances, the duration of the loan or credit, your credit score and history, and economic trends. Ultimately, interest rates shape the broader economy by impacting consumer spending and business investment. In addition, they can affect the buying power of every dollar in your savings or investment accounts. That’s why it’s important to understand how interest rates work, why they matter and how you can control them.