The Fed and Interest Rates: How Rising Rates Could Impact Your Finances
Interest rates have remained at historical lows for some time, but the Federal Reserve (often referred to as “the Fed”) started to reverse that trend in 2017. Here’s a look at the Fed and interest rate activity that has taken place so far, what’s expected for the future and what it could all mean for your finances.
Rates have increased, and more increases are expected.
The Federal Reserve has already increased interest rates twice in the earlier parts of 2017, but it chose not to increase the benchmark interest rate (which is essentially how much banks pay to borrow from the Fed) in October.
It did, however, increase its federal funds rate target range to 1.25-1.50% in December 2017 and formally announce that it will slowly begin to ease off the economic stimulus plan that has held rates low for several years. CNBC reports that there could be three more interest rate increases in 2018, and two more in 2019.
Here are six circumstances where the decisions surrounding the Fed and interest rates could have a direct impact on your budget:
1. Credit card debt could be more costly.
MarketWatch reports that credit card interest rates are expected to rise to a rate that’s about one percentage point higher than it was two years ago. Assuming you carry a balance on your variable interest rate credit cards, a rate increase could make them more difficult to pay off. That’s because more of your payment will go to interest rate charges that apply to the balance, rather than to the purchases you actually charged to the card.
Being mindful of your credit card use empowers you to control how much you’re impacted by rising interest rates. Pay off your highest interest rate balances as soon as possible. If you continue to use your credit card for new purchases, pull out plastic only for those items you could theoretically pay for in cash. You’ll be financially prepared to pay card balances in full by the payment due date (before interest rate charges apply).
2. Balance transfer rate offers could become less appealing.
Low interest balance transfer offers aren’t expected to go away entirely because interest rates are on the rise, according to MarketWatch. Yet, an increase in the Fed’s interest rates may mean credit issuers promote fewer balance transfer offers, and/or could shorten the length of the introductory period.
If you’ve considered transferring some of your high interest rate credit card balances but haven’t pulled the trigger, you may want to act quickly before the terms of balance transfer offers change.
3. Home equity line of credit payments could take a bigger chunk of your monthly budget.
NerdWallet explains that the rates on home equity lines of credit (HELOC) are particularly sensitive to Fed rate hikes, as their rates are based on a prime rate plus whatever percentage the lender adds.
The bad news? If you’ve been waiting to take out a home equity line, you’ll likely pay a higher interest rate on it than you would have last year. But, if you wait, you could pay even more in the future given the expectations that the rate hikes are far from over.
If you already have a HELOC with a variable rate, NerdWallet says now may be the time to consider refinancing into a fixed rate HELOC, if you’ll stay in your home for at least the next few years.
4. Adjustable rate mortgages could increase.
If you have an (ARM) adjustable rate home mortgage, the interest rate could go up as a result of a Fed interest rate hike — but don’t panic. CreditKarma explains that some ARM providers limit how high the rate can increase. Plus, mortgage rates are not as directly correlated to Fed rate increases as compared to a HELOC (which is based on a prime rate). If you’re concerned about an increase, call your mortgage lender and ask whether there is a limit on how high your rate could go. If your mortgage lender will increase your adjustable rate, they have to notify you by mail before it happens. If you want more certainty, it may be time to shop around for a fixed rate mortgage.
5. Variable interest rate student loans could creep up.
If you have a variable rate student loan issued by a private lender or a federal student loan disbursed before July 1, 2006, the rate on either could increase. If you have private loans, you may be able to refinance into a fixed rate alternative. If you have variable federal student loans, NerdWallet recommends exploring whether a fixed rate federal direct consolidation loan could be an option.
6. Saving could be more advantageous.
Increased interest rates aren’t the best news for borrowers, but they could work to the advantage of those with money in an online interest-bearing deposit account. Shop the deposit rates advertised by banks, credit unions and online banks. For the first time in many years, you may find several options for accounts that pay at least 1% on money deposited into a savings account.