This week the Federal Reserve raised its key interest rate by 0.25 percentage points, signaling the third rate hike since the end of 2015. While this isn’t a huge increase by any means, it will have an effect on your wallet. The fed is also expected to increase rates at least two more times this year. If they get more aggressive the impact on consumers could take a toll on consumer finance.
5 ways the rate hike can affect you
- Credit Cards - most credit cards’ interest rates are directly tied to the Federal Reserve rate so the hike will result in consumers paying an extra quarter percent interest on any balances. $2.50 per $1,000 in debt might not be a lot but it can add up.
- Auto Loans - The average price of a new car in 2017 is more than $34,000. New car loan rates are still very low with the average APR right at 4.36%. A 1/4% increase adds $3 per month to a $25,000 loan or about the price of one gallon of gas.
- Mortgages - long term fixed mortgage loans are pegged to yields on U.S. Treasury notes so they are only loosely tied to Federal interest rates as well as inflation. Typically the rates creep up ahead of Fed increases. 30 year fixed mortgage rates hit a low of 3.5% in 2012 and are now up to 4.38% but are expected to continue to rise so locking in a fixed rate is a good idea to avoid inevitable increases in ARMs.
- Student Loans - Most people have Federal Student loans, which have fixed rates so rate hikes don’t have much of an effect, except for future loans. Private student loans often have variable rates tied to the prime rate so refinancing to a fixed rate ahead of future increases is a good idea.
- Savings Accounts - Sadly, even with the Fed increase, savings account interest I not likely to rise any time soon. The average interest on savings is a paltry 0.11% and while most banks are quick to pass increases on to consumers for loan products they aren’t likely to do the same for savings. Online accounts and credit unions sometimes offer rates up to 1% higher, which can make switching worthwhile.