You may have heard that the Federal Reserve Bank (aka. The Fed) has raised its interest rate by one quarter percentage point to 2%. (Another way of saying one quarter percentage point is 25 basis points—a “basis point” is a hundredth of a percentage point.)
Digressing for a second, I should clear up any confusion about the difference between “percent” and a “percentage point,” since I know this wasn’t clear for me in the beginning.
Let’s say you have money stored in some kind of wonderful fantasy account that yields you a 50% increase each day, compounded daily. That means, if you start with $100, you will have $150 at the end of the first day. A 50% increase over the next day will leave you with $225.
If your rate of 50% is increased by 10% (that’s 10 percent of 50, or 5), you will find yourself a rate of 55%. If your rate of 50% is increased by 10 percentage points rather than percent, the result is a rate of 60%.
It all makes perfect sense, but the terminology is a little confusing for beginners.
Back to the point. What does the federal interest rate increae mean for you? It means different things whether you are mainly in debt or mainly saving money. Bankrate fills you in on the details, but mainly adjustable rate mortgages and short-term cerificates of deposit are hit with rate increases quickly, while others terms of credit or savings interest are a little slower to react.
Updated July 14, 2010 and originally published November 10, 2004. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.