Interest Rate Creep? What a Fed Hike Could Mean for Your Finances

Jennifer Liu
Posted

After much “will they, won’t they?” speculation, Federal Reserve Chair Janet Yellen told Congress Wednesday she expects the U.S. central bank will raise interest rates before the end of the year—which would make it the first rate hike since 2006.

Despite the global turmoil roiling the international markets, Yellen believes the time is almost right for the hike based on optimism that the U.S. economy will continue to strengthen—for instance, unemployment fell in June to its lowest point in seven years.

Although Yellen didn’t say when the hike would occur, economists and pundits have speculated it could happen as early as September.

The actual rate in question that the Fed would be raising is the federal funds rate, a benchmark rate that serves as a starting point for banks and lenders to set their own interest rates. The Fed has kept it at near-zero levels since the worst of the recession in late 2008 as a way to keep the economy afloat.

The idea is that by keeping interest rates low on things like mortgages and auto loans, consumers have more incentive to buy big-ticket items—thus pumping more money into the economy.

Cheaper borrowing also means businesses can expand more easily—which in turn leads to more hiring and better employment rates.

What This Means for Your Wallet

So what does a potentially higher interest rate on the horizon really mean for your money?

New borrowers, or those with adjustable interest rates on their mortgages or auto financing, will end up shelling out more for their loans than those who were able to lock in today’s lower rates.

Consumers are also likely to see a higher annual percentage rate on their credit cards—and even a small uptick could add up if you carry a balance: One CreditCards.com analysis estimates a 1% APR hike could cost Americans $7.6 billion a year, or about $48 per cardholder.

Plus, you could see those enticing 0% introductory APR offers dwindle, as the cost to banks to fund those offers would also rise along with a rate hike.

There is one potentially bright outcome: A Fed rate hike could yield a bump in the almost non-existent interest many of us now earn on our savings—the average amount of interest people earn now on their money is a mere 0.44%. Just expect the trickle-down effect on that to happen a bit slower—according to one Fed study, banks wait an average of eight months to boost savings interest rates after a Fed rate hike.

Curious to learn more? Here’s more in-depth info on how interest rates can have an impact on your personal finances.