On Wednesday, the Federal Reserve, our nation’s central bank, increased the ‘federal funds’ rate by a quarter of a point for the third time this year. This is short-term interest rate banks charge each other to loan money overnight.
Here’s how this affects you. The federal funds is connected to the ‘prime’ interest rate, which is the rate your credit card and other loans are tied to.
So, is today’s increase a good or a bad change? Simply Money Advisors wants to help you fully understand what this means to you and how to make the best out of it.
Good news for savers (kind of)
Interest rates on savings accounts and Certificates of Deposit have been pretty low for a long time – going on almost 10 years. Since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on deposits.
Any increase in interest rates will help your money grow. Just don’t expect an increase to happen too quickly. If you want to earn more, consider banking with an online bank – some of these institutions are currently offering 1% to 1.35% annual yield.
Bad news for credit card debt
If you’re currently paying off credit card debt, your Annual Percentage Rate (APR) will likely go up since this is likely a ‘variable’ rate.
Simply Money Advisors research has found that rate increases in the past have cost consumers about $1.6 billion in additional credit card interest. Work with a trusted financial planner (we recommend a Certified Financial Planner™) to develop a plan to pay off your debt faster so this rate increase won’t dig into your budget too much.
And realize this: If your credit card rate is going to go up, your credit card company might not even tell you. Why? Even though you’re supposed to get a 45-day notice of an APR increase, the company doesn’t have to alert you when the increase is triggered by a hike in the prime interest rate.
Impact on your home
If you have a fixed mortgage rate, this increase won’t impact you. However, if you’ve been on the fence about purchasing a home, it may be the time to finally make the plunge. If interest rates continue to rise, so could mortgage rates. But we’re still flirting with historically-low mortgage rates, so don’t let the prospect of rising rates change your plans.
If you have a Home Equity Line of Credit (HELOC), that rate is also linked to the prime interest rate, so expect your HELOC rate to go up. The sooner you pay off this variable-rate debt, the better.
Car loans will go up, but it won’t break the bank
If you have a fixed car loan, your rate and payment won’t change. But if you’re car shopping? Loan rates will probably increase. Thankfully, the increase shouldn’t be too bad: a quarter point increase on a $25,000 loan is about an extra $3 every month.
The Simply Money Point
Barring any sort of economic meltdown, the Federal Reserve will probably continue to increase the federal funds rate in 2018; at Simply Money Advisors, we currently think there will be two or three more hikes next year. If you have any sort of debt that you can “lock in” while these lower rates are still here, now’s the time to do it.
And bigger picture, it’s important to understand how interest rate increases directly affect you, your investments, and your personalized financial plan. Working with a trusted financial planner can help you understand how you can make the best out of these changes.
Download our free guide, ‘Why Work with a Certified Financial Planner,’ to learn more about the benefits of working with a CFP®.