Confused About the Fed Rate Increase? Here Is How It Impacts You


You might have been hearing about the "Fed Rate" increase in the news lately. Last month, the Federal Reserve voted to increase its benchmark short-term interest rate by one-quarter of a percentage point. Now, that might sound really small, but this is only the second time the rate has gone up in roughly 10 years and there are some signs that December's Fed Rate increase is only the beginning. The Fed is forecasting more increases over the next few years and as many as three rate increases this year alone.

Why does it matter? The Fed Rate impacts a ton of stuff. One seemingly small increase (like 0.25 percent) can set off a chain reaction that trickles all the way down to your wallet. Here is what you need to know:

Your Mortgage

Mortgage rates have actually been rising for a few months now. "The average rate on 30-year fixed rate loans went from 3.47 percent in late October to 4.13 percent last week," reports the Washington Post, "But that run-up put rates roughly back where they were last year before the Fed's rate increase." In other words, no big deal, but keep in mind that rates are rising gradually. You shouldn't pull the trigger on buying a house if you aren't ready, but if taking out a mortgage is in your near future, keep an eye on interest rates. Also, if you already have a mortgage and it features an adjustable rate, now would be a good time to look at refinancing to a fixed rate.

Other Loans

Auto loans are also on the rise. However, unlike a big purchase such as a home, if you are debating on buying a car, do it sooner rather than later. Interest rates could be on the rise for the next few years. Locking in a low-interest rate for your auto loan now will put you ahead of the curve.

Another loan interest rate that is going to increase? Student loans. If you have been thinking about going back to school, now is the time to do it.

Your Credit Cards

You may find your credit card payments are getting higher, too. That's because the Fed Rate impacts variable interest rates across the board. Some people will see their cards' interest rates go up by 1 to 2 percentage points. According to CNBC, "the Fed's increase is expected to raise the amount the average household pays in credit card interest to $1,309 from $1,292 a year." Again, this may sound like a small amount, but remember that the interest on your credit cards compounds. This means, "If you're accumulating credit card debt for a year," explains Markus K. Brunnermeier, a Princeton economist, "moving from 13 percent interest to 15 percent is a much bigger deal than moving something from 1 percent to 3 percent." Be aware and keep your spending in check.

Your Savings

An increase in interest rates could cause you to think that your savings account will see some benefit from a Fed Rate increase. The good news is that you aren't wrong - but the bad news is that most banks (especially the big ones) won't be passing that increase on to you right away. However, the interest rate on your savings accounts should go up over time and you may start seeing offers for new savings accounts at community banks and credit unions that are an entire percentage point higher than what you have now thanks to the Fed Rate hike.

The bottom line is that a Fed Rate increase is no reason to jump into action, but you have to be aware of what could be on the horizon and plan accordingly. Your wallet will thank you.