×

How the Fed rate hike will affect your finances

  • Wednesday's quarter-point increase in the federal funds rate may have 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-point increase will total roughly $1.5 billion in extra finance charges this year.

At a time of transition at the Federal Reserve as well as fiscal policy in Washington, the move to raise the funds rate Wednesday will inevitably impact some of the terms by which you borrow money and access credit.

With the Fed's increase of 25 basis points in the federal funds rate, its fifth since December 2015, "the cumulative effect on existing borrowers is mounting," said Greg McBride, Bankrate.com's chief financial analyst.

If you're concerned about what that will mean for your own bank account, mortgage loan or credit card, here's a breakdown of what could happen.

Credit cards

Most credit cards these days have a variable rate, which means there's a direct connection to the Fed's benchmark rate.

"If you are carrying any sort of balance, you will immediately feel the effects of [a quarter-point rate hike] and pay more interest," said Kimberly Palmer, a personal finance expert with NerdWallet. Currently, the average household with revolving credit card debt pays $904 in interest a year, according to NerdWallet.

Tacking on a 25-basis-point increase will cost credit card users roughly $1.46 billion in extra finance charges in 2018, according to a separate WalletHub analysis. Factoring in the four previous rate hikes, credit card users will pay about $7.4 billion more in 2018 than they would have otherwise, WalletHub said.

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.

Potential homebuyers exit an open house in Redondo Beach, California.
Patri T. Fallon | Bloomberg | Getty Images
Potential homebuyers exit an open house in Redondo Beach, California.

Mortgages

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 4.08 percent — up slightly from the record low of 3.5 percent in December 2012.

With interest rates rising, adjustable-rate mortgages will certainly be heading higher, too, and those with an ARM "are sitting ducks for getting another increase," McBride said.

One option to consider is refinancing. "With fixed rates still near the 4 percent mark, there's no sense in holding on to an adjustable rate," 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 home equity line of credit 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

A couple walks with a salesman, right, while shopping for a new vehicle at the Sutton Ford Lincoln car dealership in Matteson, Illinois.
Daniel Acker | Bloomberg | Getty Images
A couple walks with a salesman, right, while shopping for a new vehicle at the Sutton Ford Lincoln car dealership in Matteson, Illinois.

Auto loans

For those planning on purchasing a new car in the next few months, this change likely will not have any material effect on what rate you get. A quarter-point difference on a $25,000 loan is $3 a month, according to 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 4.29 percent and the average four-year used car loan rate is 4.91 percent.

A man uses a Wells Fargo automated teller machine inside a bank branch in New York.
Eric Thayer | Bloomberg | Getty Images
A man uses a Wells Fargo automated teller machine inside a bank branch in New York.

Savings

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 0.09 percent right now, according to Bankrate, and even with the Fed rate increase, 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.

To get a better rate, "check online savings accounts, community banks or credit unions; often you can pick up more than a full percentage point that way," McBride said. "That's easy money."

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.

Students on the campus of the University of Washington in Seattle
Mary Knox Merrill | The Christian Science Monitor | Getty Images
Students on the campus of the University of Washington in Seattle

Student loans

Federal student loan rates are fixed, so most borrowers won't be affected immediately by a rate hike. 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.

"Anticipated changes in Fed interest rates are usually already 'baked in' to the Libor rates," said Kevin Walker, head of education loans at LendingTree. "This means that if the market believes rates will generally trend higher, Libor will rise in a commensurate fashion."

Rising rates will also have an impact on fixed-rate loans, including fixed-rate student loans, over time. "Fixed rates available for new student loans will increase as underlying rates increase," Walker said. "However, once a fixed-rate loan is originated, the rate won't rise."

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.com, an online marketplace for lenders that offer student loan refinancing.

That makes this a particularly good time to identify the loans you've got and see if refinancing into a fixed rate makes sense.

More from Personal Finance:
Don't drop the ball on these year-end tax moves
Welcome to the age of 'million-dollar poverty'
Here's how to teach your kids about money