What the Fed's Interest Rate Increase Means for You: 6 Things You Need to Know
I thought many of you would find this piece of interest. It really covers everything you need to know post rate hike. -- Brian Walls, Walls Financial Group
Article written by Gail MarksJarvis, Chicago Tribune
The Federal Reserve raised interest rates by a quarter-point Wednesday in a widely expected move.
Although there have been two other quarter-point interest rate increases since the Great Recession, the rate tinkering has been so limited that people likely haven't noticed. Now, however, the Federal Reserve sounds serious about leaving the days of ultra low rates behind as the economy gets stronger. At this point, the Fed is leaning toward two additional quarter-point rate increases this year and three next year.
Fed Chair Janet Yellen said she expects gradual rate increases to persist if the economy continues on the path it's on now.
"The economy has been doing nicely," she said. "We have confidence in the robustness of the economy and its resilience to shocks."
The Fed uses higher interest rates to tame the economy. When rates climb, borrowing gets more expensive for businesses and consumers so they may hold back somewhat rather than spending as aggressively as they otherwise might. The idea is to keep the economy from overheating. At this point, Yellen said she sees no sign of overheating, but the economy also no longer needs to be nursed back to health.
Here's what the rate increase means to you.
WATCH YOUR CREDIT CARDS
Credit card rates will mimic what the Fed does. If you have a variable rate on your card _ and chances are, you do _ the interest rate you pay will increase in lockstep with the Fed's move. That means a 0.25 percent increase by the Fed will result in credit card holders paying 0.25 percent more in interest. Few credit cards have fixed rates, but if you happen to be lucky enough to have one, you will be insulated from higher rates.
To avoid having to pay increasing amounts of interest in the future, do everything you can to pay off your credit cards entirely. "Get a second job; drive Uber," said Greg McBride, an analyst for Bankrate.com. Borrowers can get a temporary zero percent interest deal by moving all credit card debts to a card offering 12 to 18 months of zero interest.
Just beware: Don't use zero percent interest as an opportunity to run up more debts, and make sure you have paid everything off completely before the zero percent deal expires. If you miss the deadline _ even by a day _ you can end up owing a huge interest rate on everything you worked so hard to pay off.
HOMES WILL GET MORE EXPENSIVE
Mortgage rates aren't like credit cards. They do not move automatically based on what the Federal Reserve does, but when the Fed is sounding optimistic about the economy, mortgage rates tend to move up. Mortgage rates already have climbed substantially during the last few months based on assumptions that the economy will strengthen and that the Fed will raise rates.
Last week the average 30 year fixed rate mortgage was at 4.21 percent. It had been 4.10 percent the week before, and 3.68 percent a year ago, according to Freddie Mac. But the big move up in mortgage rates came right after the November presidential election, when a popular notion among investors was that President Donald Trump and a Republican Congress would spur the economy with tax cuts, reductions in regulation and infrastructure spending. Just before the election the average 30 year mortgage was charging only about 3.54 percent. The move to the current 4.21 percent is a large increase in such a short period.
Since higher interest payments make monthly mortgage payments more expensive, homes will become less affordable as rates rise, and Realtors.com economist Jonathan Smoke said that will cut into some home purchases. The Mortgage Bankers Association is predicting that with rates higher, refinancing activity will drop to about 46 percent of all mortgage activity this year. Many people have refinanced mortgages during the last few years while rates have been historically low, and with the upturn, fewer will be able to cut a percent or even a half of a percent from their interest rate.
BORROWING FROM YOUR HOUSE GETS PRICIER
If you have a home equity line of credit, the interest rate you pay will climb as a result of Wednesday's Fed action. Home equity lines of credit are tied to the prime rate. The prime rate is not set by the Fed, but it is largely determined by the rate the Fed does set, which is the Federal Funds Rate.
McBride suggests calling your lender to see if you could convert the variable rate on your home equity line of credit to a fixed rate. Borrowers should also inquire as to whether refinancing into a fixed-rate mortgage would make sense.
BUYING A CAR IS INSULATED
The interest rates on car loans are not determined by what the Federal Reserve does. In fact, competition has kept car loan rates very low. The average 60-month auto loan has been very steady throughout the year, at about 4.36 percent, according to Bankrate.com.
SAVING MONEY STILL WILL DISAPPOINT
People who have been waiting impatiently for higher interest on their savings are not likely to see much relief despite the Fed's action.
The interest rates banks pay on savings accounts and CDs are not based on Fed actions. Instead, those bank rates are determined by competitive factors, including how important it is to the institution to bring in more money in the form of deposits. Currently, banks have no need to compete to get savings into accounts, McBride said. But it does pay to shop for a little extra interest. Some banks are paying as much as 1.25 percent, although that's not common.
BORROWING FOR COLLEGE GETTING MORE EXPENSIVE
Beware of private student loans with variable interest rates because those rates are likely to increase as the Federal Reserve raises interest rates, said Mark Kantrowitz, publisher of Cappex.com, a college loan and financial aid site. Most private loans are pegged to LIBOR or prime rates, which are influenced, but not set, by the Fed.
If you have a Stafford Loan, Graduate Plus Loan or Parent Plus loan from the federal government, the interest rate will not change. But students planning to attend college next fall could encounter interest rates on new Stafford or Plus loans that will be higher than those that are currently being charged. Each July the government sets the rates.
ABOUT THE WRITER
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Readers may send her email at firstname.lastname@example.org.
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