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Four Questions To Ask Yourself about Credit When Interest Rates Are Changing

Managing debt is an important consideration when you want to grow and maintain your wealth.

A couple discuss debt and interest rates with a financial professional.

For nearly a decade, U.S. interest rates have been at or near historic lows. That’s changed recently as interest rates have started to rise—and they’re generally expected to continue to do so.

At the same time, the yield curve has flattened and even inverted. A flat yield curve is when the difference between what investors earn on long-term and short-term bonds has shrunk. An inverted yield curve is when investors’ earnings from short-term duration bonds surpass what they earn from long-duration bonds. Flat or inverted yield curves have, in the past, preceded recessions.

That does not necessarily mean it is time to panic. While interest rates remain low, the cost of borrowing can potentially be attractive. As rates change, take a close look at how you’re borrowing and how you’re using cash to make sure all your choices fit well within your broader wealth plan.

“Considering your debt situation is a big part of looking at what you’re trying to accomplish,” says Evan Andrew Anderson, a Regional Wealth Planning Manager with Wells Fargo Private Bank. “The strategic use of debt—and I use the word ‘strategic’ with intention—can help you build wealth and accomplish your goals.”

Here are four questions to ask yourself about your liabilities and today’s interest rates.

1. How are you using credit?

Having the power to borrow can be useful in many ways: managing your cash flow, seeking better returns on investments, unlocking opportunities to build wealth, and passing on wealth to members of your family while avoiding having to sell off assets or to deplete an investment sooner than you expected.

“Credit can allow you to maintain flexibility and be additive to your overall wealth,” Anderson says. “It’s important to understand it, monitor it, and manage it.”

Consider taking a close look at your balance sheet to uncover all of the places where you may be exposed to changing interest rates. Make sure you’re aware of—and comfortable with—the interest rates you’re paying to borrow, and what you may have to pay if interest rates continue to rise.

“It is important to consider your full balance sheet: assets and liabilities,” Anderson says. “Now’s a great time to make sure you are comfortable with your potential exposure to risk.”

2. Where can you lessen the impact of rising interest rates?

Anderson also recommends completing a thorough review of your existing debt situation, making sure you understand the terms and what each percentage-point rise in interest rates means, both for assets you’re accessing with credit and for your broader portfolio.

If you have variable or adjustable rate loans, now might be a good time to consider reducing risk in that area, either by refinancing to a fixed rate or potentially paying it down strategically.

“It’s about taking a thoughtful approach, and thinking ahead,” Anderson says. “If you want to deleverage, you want to do so strategically and not impact your other investments.”

3. What are your upcoming plans?

Maybe you’re looking to buy a new home or vacation property, or you anticipate making some other kind of real estate investment. Or you may be thinking about opening a line of credit or creating another source of liquid funds in case something unexpected happens.

No one has a crystal ball, but borrowing money may cost more in a few years. Today’s rate environment may point to the potential of tighter credit markets going forward. For example, you may not be able to count on restructuring or refinancing your credit arrangements with the same terms and the same partners if the credit markets tighten. (See more about credit as part of an investment strategy here.)

“We’re having a lot of client conversations about interest rate risk, and making sure it’s evaluated properly with new and existing credit,” Anderson says.

4. What opportunities do you have?

With rates still relatively low—especially for longer-term fixed-rate borrowing—and the risk of tighter credit still in the future, credit remains a valuable tool for a host of goals, including:

  • Managing cash flow, smoothing out cycles, and maintaining liquidity without sacrificing investments and cash reserves.
  • Gaining tax efficiency through deductible interest payments.
  • Completing wealth transfers and generational transitions. (Learn more about wealth transfer here.)
  • Buying assets while helping maintain investment goals and cash flows.
  • Managing your portfolio to access a wider range of assets.

Anderson concludes: “If there’s a big goal you want to achieve for your family or your legacy, a major purchase you want to make, or an opportunity you want to chase, you may be able to use credit as a way to help get there.”

Mike Woelflein is a business and investment writer based in Yarmouth, Maine.

What can Wells Fargo do for you?

Talk to us about crafting strategies for managing both sides of your balance sheet.

Wells Fargo Wealth Planning Center, part of Wells Fargo Private Bank, provides wealth and financial planning services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors does not provide tax or legal advice. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

All loans are subject to credit approval.

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