Much Ado About 0.25%

Interest rates have gone through the roof in the past six months. The average consumer, however, probably won't notice.

As I wrote earlier this week, rising bond rates have many investors wondering what hit them. There's always concern that higher rates will force consumers to reduce their borrowing, thereby slowing down the economy. With consumer spending having played a vital role in driving the nation's economic growth for as long as most can remember, any threat to the ability of consumers to keep pulling their weight concerns everyone.

Yet although rising rates do affect the financial situation of the average consumer, it's not necessarily as big a deal as you might think. Sure, consumers who've already maxed out their ability to handle their debt load may find that the latest quarter-point rise in 10-year bond yields is the straw that breaks the camel's back. But just as people have managed to absorb $3 gasoline, many won't notice paying a few extra dollars on credit card or mortgage payments.

Too small to notice?

When you're looking to borrow money, lenders put the focus squarely on the interest rate. For instance, online lending services like GM 's (NYSE: GM) Ditech and IACI/Interactive 's (Nasdaq: IACI) LendingTree base their entire businesses on competition in rates. If you're shopping for mortgage rates, for example, you're seeing those rates going up. According to Freddie Mac, the average rate rose about 0.25% during the past week. As complicated as mortgages can be, it's easy to think that higher rates will make a huge difference on your monthly payment.

Turning to the trusty Foolish calculators gives you the facts. If you're borrowing $250,000 on a 30-year mortgage at 6.5%, you'll pay $1,580 per month. If you have to pay 6.75% interest on the same loan, you'll pay more -- $1,621 per month, a difference of $41.

Now don't get me wrong -- $41 isn't chump change. Over the course of a 30-year loan, that adds up to $14,760, without considering the returns you could have earned by investing it. But most people will find a way to pay an extra $41 to get the house they want, whether it means cutting back on some other expense, saving less, or taking on a little more debt each month.

Credit card blues

With credit cards, higher rates are even less noticeable. That's because when you're already paying a high interest rate, small increases don't have that much of an effect. For example, say you have a $10,000 balance on your credit card and you're paying 15%. Using a lesson in mathanese from fellow Fool Tim Beyers, that means you pay about $4.11 a day in interest. If your card rate goes up to 16%, your interest rises to $4.38 a day. That $0.27 difference amounts to a little more than $8 a month -- again, nothing to sneeze at, but an amount that many will simply ignore. Of course, for credit card issuers like Capital One (NYSE: COF) and Citigroup (NYSE: C), those $8 payments add up, going straight to their bottom lines.

To understand the full impact of rising interest rates on the economy, you have to look beyond short-term rate movements. The Federal Reserve had to raise interest rates 17 times before it saw the economic effects it was looking for. If the latest increase in long-term rates is an isolated phenomenon, then it's unlikely to have any significant lasting economic impact. However, if the latest increase marks the beginning of a much longer trend toward much higher rates, then you'll eventually see more and more people reaching the limit of their capacity to manage their debt.

Managing debt the Foolish way

Of course, the best way to deal with higher interest rates is to have your debt under control. For help with getting the best rates on your loans, take a look at our Credit Center. Also, our personal finance newsletter, Motley Fool Green Light, gives you tips every month to save more, pay less, and invest better. You can take a free look, with no obligation, with our 30-day trial.