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Here's Why That Fed Interest Rate Hike Matters To You

Here's Why That Fed Interest Rate Hike Matters To You

Angela Colley

Image by Pictures of Money via Flickr

Image by Pictures of Money via Flickr

This post was originally published on December 22.

After months of suspense, the Federal Reserve finally raised key interest rates last Wednesday from a modest 0.25 to 0.5 percent to a slightly less modest 0.5 to 0.75 percent. It is the second increase in a decade (the Feds raised rates in 2015 after holding off through the height of the Great Recession). 

We know that doesn’t sound like a lot, but before you doze off from boredom, the Fed increase could influence—albeit moderately—nearly every financial move you make in the next few years. 

Here’s what you’ve got to look forward to:

Credit Card Debt and Loans

You probably won’t notice an immediate difference, but if you’re carrying a lot of debt—say from credit cards or student loans—the Fed hike will likely translate into an increase in your interest rate. 

As NerdWallet found out during their 2016 Annual American Household Credit Card Debt Study:

Because most credit cards have variable rates, that increase is expected to raise the average credit card interest from $1,292 to $1,309 per year.

While a $17 increase doesn’t seem like an emergency situation, it’s unlikely that this would be the last Fed rate hike in the near future. If rates eventually go up by 0.5 point, that’s $34 extra in interest. If they go up by 0.75 point, that’s $52 extra in interest, and so on.

If you’re carrying high balances or living with high-interest rates from subprime credit scores, those increases are only going to be worse. 

Auto Loans

Auto loans are tied to the rate increase as well, but if you’re in the market for a new car (or soon will be), don’t worry too much. The boost in your interest rates won’t be drastic. 

“For example, on a $25,000 loan, an interest-rate bump of 0.25 percentage points would increase your interest charges by about $5 a month,” according to The Washington Post

As with credit card interest rates, if the Feds continue to raise rates, the terms you’re quoted on a new car loan will likely continue to increase. Still, it may never reach high enough to have a heavy impact. 

Mortgages

Mortgage rates are a bit trickier (and more stressful if you’re shopping for a home). Historically, mortgage rates have been tied to everything from rates on the 10-year treasury bond to big events like Brexit. And while mortgages are tied to Fed increases as well, those rates already jumped up in anticipation of the increase. 

Or in other words, what is going to happen may have largely already happened. You may see a slight uptick in rates over the next year, but the Fed increase won’t have a big impact on most home loans. 

It might, however, have a bigger impact on homeowners holding adjustable rate mortgages. As Bankrate.com explains:

Homeowners with adjustable-rate mortgages, or ARMs, might end up with bigger house payments when the next rate adjustment rolls around. ARMs are tied to indexes that are sensitive to market forces, as well as to Federal Reserve rate moves.

If you are saddled with an ARM, it would be worth keeping an eye on things as the rate increase takes effect. 

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