How Rising Interest Rates Can Have a Negative Impact on HELOCs & Credit Cards

Jan 09, 2024

Many types of loans, including Home Equity Lines of Credit (HELOCs) and credit cards, have variable interest rates. This means the interest rate charged on the loan can change over time based on changes in the economy and the interest rate environment. When rates are on the rise, this can create financial challenges for some borrowers. 

How can rising interest rates impact my loan?

Most variable rate loans (e.g., HELOCs, credit cards) are tied to the Prime Interest Rate, which is influenced by benchmark rates set by the Federal Reverse Bank. When the Prime Rate increases, so do interest rates charged on variable rate loans.

When the borrower is only making the minimum loan payment, the payment may be insufficient in covering the accrued loan interest and often does not decrease the balance. This is also known as negative loan amortization.  

What are my options:

  • Increase payment amount: One way to combat negative loan amortization is to pay more than the minimum required. This extra amount goes toward reducing the principal and can help offset the interest accumulation.
  • Refinancing: Consider refinancing to a fixed-rate loan that doesn’t allow negative amortization. This could involve negotiating new terms with your lender or applying for a fixed-rate loan, like a closed-end home equity loan or personal loan.
  • Restructuring the loan: Some lenders might offer options to modify the loan terms, such as extending the loan period or recalculating the payments to cover the interest and reduce the principal.
  • Consult a financial advisor or counselor: Seeking guidance from a financial professional can provide insights into personalized solutions based on your financial situation. They can offer advice on budgeting, repayment strategies, and navigating negotiations with lenders.
  • Stay informed and act early: Regularly reviewing loan statements and understanding the terms of your loan can help you identify negative amortization early. Addressing the issue promptly can prevent it from snowballing into a larger financial burden.

What can happen if I don’t increase my payment amount?

Negative loan amortization can lead to increased debt and financial stress. As the loan balance grows, it becomes harder to pay off the debt, potentially affecting credit scores and financial stability.

What if I’m struggling to make my payments?

If you are struggling to make your payments, contact us at 602-683-1000 to discuss your options. In addition, our partners at GreenPath offer no-cost financial counseling and a number of other services that can help you manage your money and make progress toward reducing your debt.

Call GreenPath at 1-877-337-3399 or visit their website at to review what services and options they offer, many at no cost for being an Arizona Financial member.