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Twelve months ago the Fed met to discuss rate hikes and experts expected a rate hike to come this past summer. The United States made it through the entire year rate-hike-free until about two weeks ago. The Federal Reserve decided to raise interest rates for the first time in seven years, and although it’s a small gain of just 0.25%, economists forecast that the Fed Funds rate will gradually climb over the next few years.
So what does that mean for your finances? In a nutshell, here’s what you can expect:
- Savers should start looking for higher rates on savings accounts and CD’s in order to get more for their money, although some believe savers will be the last to benefit from higher rates.
- Homeowners may want to consider locking in a fixed-rate; however, the short-term rate will have a minimal effect since most mortgages are 30 years.
- Investors should stick to long-term investments, as volatility is expected.
- Entrepreneurs and business owners with business loans should expect rates to rise, but only for lenders who use the prime rate to set their rates.
- Credit card holders with revolving credit will be the most affected. Borrowers should consider switching to a 0% interest credit card.
Why Are Credit Card Rates Most Affected
The majority of credit card rates aren’t fixed, which is why this market is heavily affected by the rate hike. The federal funds rate is the overnight rate banks use to lend to one another, which also determines the prime rate. The prime rate is the rate banks charge their most creditworthy borrowers. The risk of defaulting is the main determiner for interest rates, and according to Forbes, bank earnings are driven more by the creditworthiness of their borrowers than spreads on loans, which is good considering the creditworthiness of new borrowers is at record highs.
Those who carry a balance month-over-month can expect their APR to increase, and also their minimum monthly payment, making it harder to pay-down debt. Consumers that don’t carry a balance, have a fixed-rate credit card, or use a charge card won’t be affected by this change.
Actionable Steps for Revolvers
“This is an important time for consumers to evaluate their current credit health and take steps to ensure it stays healthy tomorrow, too,” said Farnoosh Torabi, personal finance expert and financial education partner with Chase Slate. Torabi suggests consumers to live within their means and set financial goals for the future, but also take steps to work towards them.
Of course, it goes without saying that the larger the balance, the more you’re going to feel the effects of the rate hike. But what you may find interesting is the hike won’t really affect you that much at all. Let’s say you have a credit card balance of $3,000 and you’re paying a 21.99% variable interest rate, but have no intention of making any more charged on the card while on your journey to reach a zero balance in 12 months. At the end of those 12 months, you will pay $369.22 in interest. If you take the same scenario and increase the interest to 22.24% variable (the quarter of a percent rate hike that went into effect), you will pay less than five dollars more ($373.56).
If you carry a revolving balance, here’s what you should do:
- Maintain good credit. Since the best rates are offered to consumers who are of little credit risk, rate hikes won’t affect you too much if you are already offered the lowest rates possible. You can help maintain and build good credit by regularly monitoring your credit using a free credit monitoring service.
- Perform balance transfer. If you can, try switching a high-interest credit card balance to a 0% intro balance transfer credit card. This actionable step would make the rate hike completely meaningless to you.
- Reduce debt. Debt carriers should always work towards limiting their debt load no matter what the prime rate sits at. Look for ways to cut your spending, adjust your budget, and allocate funds appropriately. As an added bonus, you’ll love watching your credit score grow every month!
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