On December 13, the Federal Reserve announced its third interest rate hike of 2017 (and fifth since December 2015). That rate is the one that banks use to set their rates for credit cards, savings accounts and other consumer financial products, which means an increase is a pretty big deal.
Overall, the trend upward is a good thing. The reason the country’s central bank, or Fed, kept its “benchmark” rates low for the last decade was to help pull the U.S. economy out of the Great Recession. Low rates were intended to make it easier for people and businesses to borrow money, which in turn could give the economy a boost.
Now we’re seeing that mission (kind of) accomplished, based on a much improved labor market and a solid GDP growth rate, which measures the growth in the value of goods and services produced by U.S. citizens and companies. So, the Fed’s bumping up rates again.
Even with the increases, though, rates are still pretty low. The federal funds rate, which banks and credit unions charge each other to lend money overnight, has been hovering around 1.16 percent. And the new increase is just a quarter of 1 percent to a range of 1.25 to 1.5 percent.
So, what does all of this mean for us?
1. If you have credit-card debt, it’s getting more expensive.
When the Fed raises rates, variable-rate loans, like credit cards, are usually the first consumer products to feel it. And that change can be costly: According to WalletHub, the four rate hikes we’ve seen since 2015 have added $6 billion in interest charges to our 2017 credit card bills. Ouch. The latest increase could tack on another $1.46 billion throughout 2018.
Silver lining? If you pay off your balance in full every month, you won’t be affected at all by higher rates—so consider this extra incentive to start clearing away your debt now.
2. If you have money in a savings account, you can earn a little more.
Banks aren’t quite so quick to reward savers with higher yields, unfortunately. The average savings account rate inched up just 7 percent in 2017 from 0.180 percent in January—or a whopping 18 cents for every $100 you save—to 0.193 percent in November, according to DepositAccounts.com. Internet savings accounts, however, were far more generous this year, increasing their average yields by 29 percent, from 0.723 percent to 0.933 percent. So clearly, it pays to shop around when you’re looking for where to stash your savings.
3. If you’re planning to buy a home, you’ll likely pay more for a mortgage.
If you’re a homeowner with an existing fixed-rate mortgage, the Fed’s moves won’t affect you. (Although those with adjustable-rate mortgages are likely to see their rates increase after the initial fixed period ends.) But if you’re still hoping to buy one day, you’re likely going to face higher costs now than if you’d closed a year ago. The average 30-year fixed rate mortgage has gone up from 3.6 percent in 2016 to about 4 percent in 2017, according to the National Association of Realtors. And it’s expected to head up to 4.5 percent for 2018.
If you can, you may want to speed up saving for a down payment to hop on lower rates—or else, factor higher rates into your home buying budget. And work on improving your credit score to qualify for the best rates possible.
So, start preparing now—by paying down debt, finding high-yield savings accounts, boosting your credit score and locking in a good mortgage rate when you’re ready. Fortunately, these are all savvy financial moves, regardless of what happens with the Fed and interest rates.
This story was updated on December 13.
December 12, 2017