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Will the Fed’s Rate Increase Cost You More Money?

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Unless you’ve been living under a rock, you’ve probably heard whisperings of the Federal Reserve’s rate hike last month. This is only the third time since the Great Recession that the Fed has increased rates… and, well, it’s both a good thing and a bad thing.

A Fed rate increase means that the economy is on the upswing. The Fed will only raise the benchmark rate when the economy no longer needs stimulus. Janet Yellen, chairwoman of the Fed, said that her organization plans to go slowly with such rate increases. So, it’s best to assume that the Federal Reserve is cautiously optimistic about the economy and where we stand today.

The most recent benchmark increase was only a bump from .75 to 1 percent. It doesn’t seem like much, but even a tiny change in the benchmark rate can spell major changes for your personal financial situation. Let’s take a look at what the latest increase may mean for you.

How the Fed changes interest rates

The Federal Reserve doesn’t directly affect interest rates. Instead, its benchmark rate affects the federal funds rate — the rate that banks charge each other. The banks then pass those costs (or savings) on to consumers by changing the rates of short-term loans. Then, when short-term rates increase, long-term rates increase, as well.

In short, when the Fed increases its benchmark rate, you’ll first feel the pinch with your credit cards and other adjustable-rate or new shorter-term loans. But you’ll eventually feel the pinch if also you try to take out a longer-term loan, like a mortgage.

Here’s how the current rate increase is most likely going to impact your wallet:

If you have adjustable-rate debt

Variable- or adjustable-rate debts — like credit cards, HELOCs, and variable-rate mortgages — will likely be the first place to feel the difference, post-rate hike. A quarter-percentage interest hike doesn’t seem like much, but it can really add up over time. This is especially true if you’re carrying around a lot of credit card debt.

Let’s assume that you’re holding the average American family’s $16,000 worth of credit card debt. Depending on your terms, the rate increase could potentially cost you several hundred dollars per year.

Learn More: How Is the Nation REALLY Doing With Credit Card Debt?

Just how much more can you expect to pay on your variable rate loan? Dig into your statements to ensure you always know your rates, even as they change. Then, use an online calculator to see how much you’re going to pay in interest when your rate increases.

The best way to deal with this particular issue? Just pay off that debt as soon as you can. Right now, you may only be looking at a difference of $100 a year or less. But if the Fed continues to increase their benchmark rates, the interest rates on your already higher-interest debts are only going to increase.

Need a boost to get you started? Consider transferring some of your debt to a card with a 0% APR introductory period. Paying no interest for even 12 or 15 months can make it much easier to get that principal paid down before you end up paying through the nose because of rate increases.

If you have, or are in the market for, a mortgage

Fixed-rate mortgages, which remain the most popular option, may not skyrocket immediately. But the pinch will come.

According to Freddie Mac, the average 30-year, fixed-rate mortgage in January charged 4.15% interest. In March, that increased to 4.2%. That’s a fairly large increase from this time last year, when rates were more like 3.69%. But from February to March, that much of an increase would probably only make a few dollars’ worth of difference in your monthly payments.

With that said, even a point’s difference on a 30-year mortgage can have a big impact on your finances over time. That’s because you’re paying interest on this loan for so long. Even a few bucks a month will add up over the course of 30 years!

Read More: Can This Simple App Get You Out of Debt?

So, what should you do with all of this in mind? Well, if you’re in the market for a mortgage, you might try to buy sooner rather than later. But only if you have a sufficient down payment and good credit. It doesn’t make sense to pay more for a mortgage, simply because you’ve rushed in before you’re financially ready.

With the Fed’s cautious outlook, it doesn’t seem that interest rates are going to skyrocket any time soon. So, it doesn’t make sense to lock in a lower rate if you’re not financially prepared to buy yet.

What about those who already own a home? If you’re still paying pre-Great Recession interest rates of 5% or more, you might want to consider refinancing while the rates are still low. This is especially true if you’re also in a better credit and all-around financial situation now than you were last time you bought or refinanced your mortgage. If nothing else, it’s worth looking into your refinance options now, before rates increase any more.

In the Know: Can You Refinance Your Mortgage With Bad Credit?

If you have savings and investments

Just as interest rates on consumer debt are rising slowly, so will rates on savings products. Chances are you’ll see a slight increase on the rate on your interest-bearing accounts, including savings accounts. Other interest rates — like those on CDs — will also rise, albeit slowly.

Bottom line: now could be a good time to shop around, Make sure that you’re getting the best interest rate on your high-yield savings accounts and, if you’re not, think about switching.

What about your longer-term investments, including those in your retirement account? It’s much harder to predict a rate hike’s impact on savings vehicles like these. When it comes to long-term investing, just stay the course and keep paying attention to the basics, like asset allocation.

Related: The Perfect Asset Allocation Plan

So, what exact impact will the Fed’s rate increase have on you? It really depends on your current financial situation, especially your debt and savings account mix. Just be sure to pay attention to interest rates on both debt products and savings products, so you can take advantage of the best deals around.

Updated May 5, 2017 and originally published May 4, 2017.

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