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The economy is looking rosy, and Federal Reserve officials showed their optimism by raising the benchmark interest rate by a quarter of a percentage point Wednesday for the sixth time since December 2015. The central bank lifted the federal funds rate to a range of 1.5% to 1.75%. This latest Fed rate hike is the first under new Fed Chairman Jerome Powell, who replaced Janet Yellen.
Higher interest rates are great news news for savers, but they can sting those who carry debt or want to take on more debt. As the Fed boosts rates on financial institutions, banks turn around and lift interest rates on credit cards, auto loans, small business loans and home mortgages.
Let’s look at the fed rate hike and what higher interest rates mean for the average consumer:
Good news for savers
A sixth fed rate hike in short-term rates may be the kick that banks need to raise rates on deposits and products like certificates of deposit (CDs). Banks have started taking baby steps towards raising their deposit rates with the average rate on a one-year CD climbing to 0.49% last week, according to Bankrate.com – that marks the highest level in more than seven years.
“The rate increase will likely lead to some increase in deposit rates, but at less than a one-for-one rate,” says Dan Mahoney, senior economist at the Government Accountability Office.
This is great news for savers — further anticipated hikes in 2018 will only benefit their bottom line.
Credit card interest rates will rise
Since most credit cards have variable rates and are directly connected to the Fed’s benchmark rate, card holders will feel the pinch in the next few billing cycles.
The national average credit card rate sits at 16.84%, according to Bankrate, with many offers sitting near the 20% range. Tacking on a 25-basis-point increase will cost credit card users roughly $1.6 billion in extra finance charges in 2018, according to a WalletHub analysis.
You can insulate yourself from higher interest rates by paying your balances off. If your balance is higher than you can afford to pay off and you have good credit, consider a balance-transfer credit card offer with a low or zero introductory interest rate.
It’s a smart idea to shop credit card balance transfers and the fees before taking the plunge. You’ll want to make sure you can pay down your debt during the introductory period or you could end up with a higher-than-expected interest rate.
Auto loan interest rates will rise
Yes, interest rates are up, and they do directly affect auto loans, however, with tight competition among lenders, higher rates will most likely be held down for a while.
The rate on a five-year auto could inch up about a tenth of a percentage point, not making much of a difference in monthly payments. In fact, that’s an increase of just a couple of bucks per month.
Mortgage loan interest rates will rise
While the Fed’s key short-term rate affects fixed mortgages only indirectly, and correlate more closely with inflation and long-term economic expectation, mortgage rates have been climbing steadily over the past year and overall are becoming more expensive.
Higher interest rates typically depress home values by making monthly mortgage payments more expensive.
A quarter-point rate increase on a $200,000 mortgage would boost the monthly payment by about $30, but if the Fed continues to raise rates throughout 2018, it could move the 30-year mortgage rate to nearly 5% by December.
Prepare for another fed rate hike
With a booming economy and low unemployment, experts expect to three or four more fed rate hikes this year.
Mahoney says, “The federal reserve is expected to continue raising rates throughout the year. The new chairman, Mr. Powell, is not expected to differ in his policy goals from the previous chairman. The Federal Reserve continues to monitor the U.S. economy, and any unexpected changes to the economy, particularly with respect to either inflation or unemployment, could cause the Fed to deviate from its current path.”
There’s not much you can do about rising interest rates, especially when you’re looking to take on more debt with the purchase of a home or car.
However, if you’re currently saddled with high interest debt in the form of credit card and student loans, experts agree it’s probably a good idea to investigate lenders who offer loans specifically tailored to those who want to consolidate debt with a fixed rate.
The next Federal Reserve meeting is scheduled for May 1-2, 2018.