After the Federal Reserve hiked its benchmark interest rate for just the second time in eight years on December 14, expect a ripple effect to affect your finances.
Any kind of variable-rate loan is probably going to cost more money in the near future. Paying off the debt as soon as you can can help you avoid the consequences the most.
The federal funds rate, which represents the fee that banks charge one another for overnight loans, was increased by the Fed by one-quarter point, moving it from a range of 0.25 to 0.5 percent to a range of 0.5 percent to 0.75 percent. Since 2008, the rate has been nearly zero. Consumers may eventually pay higher interest rates as businesses must pay more to borrow money.
Here are seven ways where your finances can suffer:
1. Charge cards
If you don’t pay off your credit card balance in full each month, you’re undoubtedly paying a variable interest rate on your revolving credit. The majority of credit cards have annual percentage rates between 10% and 24%. (Some neighborhood credit unions offer APRs as low as 5 or 6 percent; the maximum interest rate that an issuer may charge is uncapped.)
A word about fixed-rate credit cards: their APRs should, in principle, never change. Although they are less frequent today, fixed-rate cards are nevertheless occasionally available. It’s crucial to realize that a fixed-rate card’s interest rate is subject to alter, provided the issuer gives the cardholder the legally needed written notice. Variable-rate credit cards make up the vast majority of cards issued today. As the cost of borrowing for the issuing bank increases and decreases, the variable APR fluctuates.
The prime rate, which is roughly 3 percentage points higher than the federal funds rate, is where most credit cards base their variable interest rates. The Fed’s decision to increase the federal funds rate will result in an increase in the prime rate, which will ultimately result in a one- to two-percentage-point increase in credit card interest rates.
If you pay interest fees on your credit card and the interest builds, the results might not be seen right away. You will first be required to pay interest on any amounts that are owed to you, and then on interest that has been accruing on the principle.
Consumers may borrow less money, use their credit cards less frequently, and make fewer purchases as a result of higher interest rates.
2. A line of credit for home equity
A home equity line of credit, sometimes known as a HELOC, is another sort of revolving lending. Since the majority of HELOCs are also based on the prime rate, you can anticipate a hike in that rate following a Fed increase in the federal funds rate.
3. Home loans
Long-term mortgage rates are not immediately affected by the Fed’s interest rate, but banks typically find a method to pass along their higher borrowing costs to customers. The good news is that mortgage rates are still more affordable than they were previously, and home loan rates are still relatively low.
Your interest rate is fixed and you won’t pay extra if you currently own a home and have a fixed-rate mortgage.
Rising interest rates may have a number of effects on you if you’re considering buying a home or already own one with an ARM.
ARMs often adjust themselves every three to five years. They are linked to an index that is probably going to increase as interest rates do. This shouldn’t come as a surprise to you if you have one.
In anticipation of upcoming Fed rate rises, mortgage rates have also been rising since September. According to Freddie Mac, a five-year ARM had an interest rate of 3.19 percent as of December 15, 2016, up from 3.17 percent a week earlier and 3.03 percent a year earlier.
On December 15, the average rate for a 30-year fixed-rate mortgage was 4.16 percent, up 0.5 percentage points from the previous week and from 3.97 percent.
According to the Housing Opportunity Index (HOI) of the National Association of Home Builders, low mortgage rates of 2-4 percent since 2011 have offset home price increases of 45 percent during that time, making homes accessible for the majority of people.
In the third quarter of 2016, the HOI discovered that 61.4% of homes were within the means of those with median incomes. Affordable is defined as a household paying no more than 28% of their monthly income on housing. A rate of 50 percent or above is thought to be affordable.
Declining property prices can be aided by rising interest rates. Higher home loan interest rates may deter prospective buyers, which would prompt home sellers to lower their asking prices. A buyer’s market might develop.
As interest rates rise and landlords attempt to pass along their greater costs to tenants, renting a house or apartment could become more expensive. Typically, investors who purchase rental houses pay higher interest rates than private homeowners.
First-time homebuyers might be priced out of the market by higher loan rates, which would encourage more people to enter the rental market.
According to Steve Hovland, director of research at HomeUnion, an online real estate investment management company, “Sufficient rental demand will enable property managers to raise rents in virtually every major and secondary metro nationwide, with the exception of the most heated housing markets and in markets where apartment construction is robust.”
5. Car loans
Auto loan rates have also begun to rise in anticipation of the Fed’s rate hike, just like home loan rates have. Because auto loans fluctuate in relation to the prime rate as banks and other lenders react to the federal funds rate, they are expected to keep rising.
According to the Fed’s forecast, interest rates will continue to rise in 2017, which will probably result in higher vehicle loan rates in the next years.
Rates for auto loans are currently cheap. With automated payments, a borrower with excellent credit can get a new car loan from USAA for as little as 0.99 percent interest.
6. Education loans
Federal student loan rates will increase for borrowers since they are based on the 10-year Treasury rate, which the Fed anticipates will climb.
In the upcoming years, interest rates on federal student loans could increase by 1-2 percentage points.
The majority of student loans have fixed interest rates, so students who already have loans won’t likely be impacted by the Fed rate change.
However, fixed and variable rates are available for private student loans. Although variable student loan rates may not have increased significantly as of yet, if the Fed keeps rising rates, these rates could increase because private lenders sometimes connect their rates in some way to the prime rate.
7. Groceries and everyday essentials
Due to the higher cost of borrowing money, living expenses such as gas, groceries, and other necessities will probably increase. The increased operating costs may be passed directly to customers by businesses.
Money becomes more scarce as the federal funds rate rises, thereby lowering demand for consumer goods, including food.
In 2023, what will happen?
According to predictions made by the central bank, the Fed will raise rates three times in 2023, bringing them to 1.4 percent by the end of the year. If the new president and Congress lower tax rates and increase expenditure, the Fed may raise rates more quickly to combat increasing prices.
If a loan is imminent, consumers would be wise to take advantage of the current low rates and pay down variable-rate balances. You can use Credit Sesame to find the personal loans that best suit your needs and credit profile.
It can also be beneficial to raise your credit score in the coming year. Paying your bills on time, paying off your credit card balance in full each month, keeping your accounts open, and avoiding applying for additional credit until absolutely required are the greatest strategies to raise your credit score. When you do decide to apply for a credit or loan product, having a high credit score will enable you to acquire the most affordable interest rates.