Straight Talk

What a Fed rate hike means for you

The Fed and your finances

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The Federal Reserve raised its target federal funds rate by 0.25 percent on Dec. 16, the first such hike since 2006. While it is a small increase, it could have a trickle down effect on your bank account, 401(k) plan, adjustable-rate mortgage loan and even your credit card.

The Fed's decision to edge off of a crisis-level rate policy was long anticipated and experts say this first rate hike in nearly a decade might not have much of an impact overall. But if you're concerned about what this means for your own finances, here is a breakdown and what you can expect.

— By CNBC's Jessica Dickler
Reposted 17 December 2015


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The Fed has little influence over long-term, fixed-mortgage rates, which are pegged to yields on U.S. Treasury notes, so don't expect higher mortgage rates to weigh on your ability to buy a home or refinance in the near future.

But with interest rates rising, adjustable rate mortgages could be heading higher, too so don't be surprised to see some payment increases down the road if you have one.

"You will get a notice that your payment is going to change, typically about 45 days out, but you need to be thinking further ahead of that," advised Chief Financial Analyst Greg McBride. "Now is a great time to refinance out of an adjustable rate mortgage and lock in a low fixed rate."

Currently, mortgage rates are near the lowest levels ever with the average 30-year fixed standing a little over 4 percent only half a percentage point above the record low.

Auto loans

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For those planning on purchasing new wheels in the year ahead, interest rate increases are not going to have any material effect on your ability to buy a car.

A quarter-percentage point difference on a $25,000 loan is $3 a month, noted Bankrate's McBride. "Nobody is going to have to downgrade from an SUV to a compact because of interest rates," he said.

However, this is a good reminder to car shoppers to find the best financing offer before you buy. It often pays to shop around online and line up a loan before you head to the dealership.

Read More Fed worries auto industry may feel most heat from rate hike

Credit cards

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Credit card rates are predominantly pegged to the federal funds rate and will rise in step with interest rate increases. APRs are variable rates, which means they are tied to the benchmark rate, and if that rate rises, you could also see your rate increase typically in one to two credit card cycles without any advance notice.

So, "grab those zero-, or low-rate, balance transfer offers while you still can to pay off or pay down your debt," McBride advised. If rates continue to rise, "those offers will become less generous," he predicted.

Read More Beware of deferred interest credit cards


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Stashing some cash in a savings account has yielded nearly nothing for years, aside from peace of mind, and that's not likely to change much.

The average rate on a savings account is 0.08 percent, according to — less than the rate of inflation. Even with a Fed rate hike, banks may not pass on any of that increase to their customers, which means the interest on deposits will remain near rock bottom.

"If banks do pass on a portion, or all, of the interest rate increase to customers, that doesn't solve the yield drought that's been going on for seven years," said Barry Glassman, founder and president of Glassman Wealth Services. "And that's if the banks pass along the increase to their customers," he added.

Read More How to invest — yes, invest — your savings

Student loans

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Federal student loans with a fixed interest rate won't be impacted by the rate hike. But if you have a private loan with a variable rate, that rate is likely to rise, which means so will the interest you pay on the principal of the loan.

Still, "there is nothing to freak out about," noted Max Spiegel, chief operating officer Student Loan Hero, a student-loan management site. "There will likely be some gradual increases over time but the initial increase will be very nominal so it's not going to hit your pocket that much, that's the bottom line," he said.

If you have private loans with variable rates — and you are worried about it — it's not too late to refinance into a fixed-rate loan and lock in a low rate. Even a loan that's already been refinanced can be refinanced back to a fixed-rate loan, Spiegel said.

Read MoreThe best way to avoid crushing student loan debt

401(k) plans

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Bond funds are a big part of many 401(k) plans, and there's likely to be some volatility there in the short term since bond prices fall as rates rise.

However, "the higher coupons will ultimately deliver higher returns if investors grit their teeth and hold on," McBride said.

For the 401(k) investor, it's important to look at the big picture, he said.

"If the Fed is raising rates, it's a sign of a healthy economy and that's ultimately good news. Maintain that long-term perspective," McBride advised.

Read MoreWhat the rate hike means for your retirement