- June's quarter-point increase in the federal funds rate has far-reaching consequences for consumers.
- Here's a breakdown of what could happen to your student loan tab, savings account, mortgage, car loan and credit card.
- For those who carry a balance on their credit cards, the quarter-percentage-point increase will cost roughly $1.5 billion in extra finance charges this year.
June's quarter-point increase in the federal funds rate by the Federal Reserve likely will change some of the terms by which you borrow money or access credit.
"Fed rate hikes, while still slow, are starting to accelerate," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Investment Institute. "The pace at which interest rates have been rising has been so slow that investors may not feel the heat until it's boiling."
If you're concerned about what turning up the temperature will mean for your own bank account, mortgage loan or credit card, here's a breakdown of what could happen.
Most credit cards these days have a variable rate, which means there's a direct connection to the Fed's benchmark rate. The quarter-percentage-point rate hike means you'll pay an extra $2.50 a year for every $1,000 of debt, according to NerdWallet.
That will cost credit card users roughly $1.5 billion in extra finance charges during 2017, according to a WalletHub analysis. Factoring in the three previous rate hikes, credit card users will pay about $6 billion more in 2017 than they would have otherwise, WalletHub said.
"Each change adds up and increases your debt burden," said Sean McQuay, Nerdwallet's credit card associate. However, there's still time to consider a zero-interest balance transfer offer and make aggressive steps toward paying down your high-interest debt once and for all.
The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there's already been a creep up from record-low levels well before the Fed made any official move.
The average 30-year fixed-rate mortgage is now about 4.04 percent — up slightly from the record low of 3.50 percent in December 2012.
With interest rates rising, adjustable-rate mortgages will certainly be heading higher too and those with an ARM "could see their monthly payment go up this year," said Greg McBride, Bankrate.com's chief financial analyst.
One option to consider is refinancing.
"There is no sense in bearing the risk of an adjustable rate when you can lock in a fixed rate at 4 percent and be done with it," he said.
Many homeowners with adjustable rate home equity lines of credit, which are pegged to the prime rate, also will be affected. But unlike an adjustable-rate mortgage, these loans reset immediately rather than once a year.
For example, a rate increase of 25 basis points would cause borrowers with a $50,000 HELOC to see a $10 to $11 increase in their next monthly payment, according to Mike Kinane, senior vice president of consumer lending at TD Bank.
While that's not a big change, those worried about the escalation of rates can often convert the balance into a fixed-rate option at any time, Kinane said.
For those planning on purchasing a new car in the next few months, this rate change likely will not have any material effect on what rate you get. A quarter-percentage-point difference on a $25,000 loan is $3 a month, according to Bankrate's McBride.
"Nobody is going to have to downsize from the SUV to the compact because of rates going up," he said.
What will affect what kind of car you can afford is checking that your credit is in good shape, negotiating the price of your vehicle and shopping around to secure the best rate on your financing. "Don't lose sleep over interest rates," he said.
Currently, the average five-year new car loan rate is 4.42 percent and the average four-year used car loan rate is 5.07 percent.
Stashing some cash in a savings account has yielded not very much, aside from peace of mind, and that's not likely to change. The average interest rate on a savings account is about 0.08 percent right now, according to Bankrate, and even with the Fed rate hike, banks may not pass on any of that increase to their customers, which means interest on deposits will remain near rock bottom.
Banks' terms allow them to be slower to raise rates on savings products than they are on loans and credit cards, according to Nick Clements, co-founder of MagnifyMoney.com.
Rather, "check online savings accounts, community banks or credit unions; often you can pick up over a full percentage point that way," McBride said. "That's more than tenfold the interest you are earning now."
That will add up. An account paying 1.10 percent in interest earns about $275 more per year than an account with a rate of 0.01 percent on savings of $25,000, according to NerdWallet.
Federal student loan rates are fixed, so most borrowers won't be affected immediately by a rate hike. But if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, the prime rate or T-bill rates — which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
"If the federal funds rate rises by 25 basis points, one can expect the interest rates on variable loans would increase by the same amount," said Stephen Dash, CEO of Credible.com, an online marketplace for lenders that offer student loan refinancing.
While most borrowers have federal student loans, many others have a mix of federal and private loans, and nearly a quarter, or 24 percent, of student-loan borrowers don't know the difference between fixed- and variable-rate loans, according to Credible.
That makes this a particularly good time to identify the loans you've got and see if refinancing into a fixed rate makes sense, Dash said. "There still exists a very meaningful savings opportunity."