Last week, the Federal Reserve Board voted to raise their benchmark interest rate a quarter of a point so it will sit between .5 and .75%. It’s big news because it affects the majority of instruments you use for daily and monthly finances. Every loan you have that isn’t a fixed rate is affected by the increase and probably the most important change will be on your credit cards.
Rising rates mean more money spent on interest and more money earned in interest. Now is a good time to plan on eliminating your debt and increasing your savings.
Your credit card company usually has to wait 45 days if they’re raising your rate, but since it is triggered by the Federal Reserve they don’t even have to notify you. Check your APR on your next statement to know where your rate is and if it has increased by a little or a lot.
The increase should mean an extra $25 per year for every $1,000 in debt you carry, so be prepared to pay that little bit extra on whatever money you have on your credit cards.
Of course, you can pay off your credit cards and not worry about interest anymore, just what rewards your card provides.
The rate increase has been rumored for sometime, so mortgage rates have been slowly rising since the beginning of fall. Now that it’s official, rates for different mortgages will rise to the new level barring any other major economic news.
There are two main groups the rate hike affects, home buyers and people with adjustable rate mortgages.
Buying a home just became more expensive. For a $300,000 home, each half point increase in your rate means $100 added to your monthly payment. So compared to the last six months, it’s an increase, but the average interest rate over the last 44 years is 8%, so relatively speaking rates are still low in the 4% range for 30-year fixed mortgages.
If you already have your mortgage, but it has an adjustable rate then you’re looking at an increase whenever your rate adjusts again. The Federal Reserve signaled it will most likely continue to increase the rate in 2017, so this may be the first bump followed by several more. Really there are two options, you can refinance with a fixed rate before your adjustment happens or you can wait and see. Depending on where you live and how much is left on your mortgage, your payment may increase between $20 and $112. Zillow said the average increase in half of the nation's metro areas will be under $25.
If the interest rate makes the difference between affording and not affording a home, then you probably couldn't afford it in the first place. Don't depend on the bank to let you know what you can afford, plan for it yourself. Housing shouldn't be more than 30% of your expenses.
For car loans, your payment will increase between $3 and $7 depending on how much you have left to pay. If you’re in the market for a car and concerned about rates, then your best option is to have good credit.
Even as rates go up, you’ll have opportunities to get promotional rates like 0% or .9% interest. While the average rate will be higher, your good credit can still get you an excellent rate.
Federal student loans carry a fixed rate, while private loans are adjustable and will probably increase. If you have a mix of the two, refinancing into a fixed rate loan may be a good option, if it makes sense financially.
Even with fixed rate federal loans, the rate will increase in the future, so if you’re planning on student loans to get you through college, offsetting those in some way with scholarships, grants or an extra job will help keep you from paying more in interest.
Savings and CDs
Now for the good news. When the interest rate increases, typically so do rates that you earn on savings, CDs, money market accounts, etc. General savings accounts probably won’t see much of an increase, while the others will over time. Putting money into saving and investing will help you receive interest, instead of only paying higher rates.
What it Means for You
1. Eliminate your debt so you no longer have to pay interest.
2. Save money so you're earning interst instead.
3. Keep a strong credit score/history to make sure you qualify for lower interest rates no matter the economic climate.
If you're ready to pay off your debt and start saving, Mvelopes can help you create a plan to do both and live within your budget each month. Sign up today for a free debt analysis.