×

What rising rates this year may mean to your finances

The Federal Reserve announced Wednesday it would leave interest rates unchanged, though it still forecasts three hikes later in 2017. The Fed moves could increase the cost of your debt and limit your access to credit.

You can prepare for those rises now by reducing your debt, grabbing low-rate offers and changing the terms of your loans.

"Take a look at how you're paying your debt," said Stacey Tisdale, CEO of financial literacy company Mind Money Media. "For people carrying little or no balance, the impact [of a Fed rate hike] would barely be felt. Those carrying large balances would see a noticeable difference."

Here's a breakdown of how a rate increase or several hikes would affect your credit cards, mortgages and student loans.

Credit cards

The national average annual percentage rate on new credit card offers rose to a record high of 15.44 percent, according to a recent survey by CreditCards.com.

Most credit cards charge a variable rate. So when the Fed raises its benchmark rate, the interest charged on your cards will usually go up as well.

If you have good credit, you can shed credit card debt with zero percent balance transfer offers from card issuers. Some of those deals can last as long as 21 months, said Greg McBride, chief financial analyst at Bankrate.com.

Balance transfers work the best when you pay off what you owe before the introductory rate ends. "If you carry a balance past the time, it's possible with some of these credit agreements that you could pay interest retroactively," said Tisdale of Mind Money Media.

Mortgages and home equity lines

Mortgage rates are near their highest level in two years.

Fixed-rate mortgages are pegged to the yield of the 10-year Treasury, which is partially influenced by Fed hikes as well as the overall economy. Some adjustable-rate mortgages increase their rates once a year based on what the central bank does.

"Switching to a fixed-rate mortgage may be a tough sell on the surface because rates on many adjusted-rate mortgages are lower now," Bankrate.com's McBride said. As rates rise, the benefits of a fixed-rate mortgage may become more attractive to borrowers.

Borrowers with home equity lines of credit should keep tabs on their draw period.

Many of these credit lines have a 10-year period in which borrowers only have to pay interest on the principal, not the full loan amount. Unlike an adjustable-rate mortgage, these loans adjust immediately rather than once a year.

"People who have just been skating by with paying interest on their home equity lines of credit could be hit with a double whammy when those lines reset," McBride said.

Student loans

For most of the nearly $1.4 trillion in U.S. student loan debt, a rate hike means nothing for now. That's because 92.5 percent of those loans are from the federal government and carry a fixed rate.

Roughly 7.5 percent — about $102 billion — of U.S. student loans are privately financed, according to MeasureOne, a higher education data and analytics firm.

Private student loans have fixed and variable rates. Nearly a quarter of student loan borrowers didn't know the difference between fixed and variable rates, according to a survey by Credible.com, an online marketplace for lenders that offers student loan refinancing.

People with variable-rate student loans may not experience a big increase in their borrowing costs now, but may feel the pain of multiple rate hikes.

"We saw consistent month-over-month growth in student loan refinancing throughout 2016, and the Dec. 14 rate hike has not slowed that growth," said Stephen Dash, Credible's founder and CEO. "Once all the numbers are in, we expect January will be Credible's best month ever for student loan refinancing volume."