On March 21, the Federal Reserve, now headed by new chair Jerome Powell, announced its first interest rate hike of 2018 (and sixth since December 2015). That rate is the one 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 1.42 percent. And the new increase is just a quarter of 1 percent to a range of 1.5 to 1.75 percent.
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 previous five rate hikes since 2015 have added $6.8 billion in credit card interest charges to date. Ouch. The latest increase could tack on another $1.6 billion this year.
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 has inched up from 0.18 percent in March 2017—or a whopping 18 cents for every $100 saved—to 0.21 percent in March 2018, according to DepositAccounts.com. Internet savings accounts, however, were far more generous, increasing their average yields by 43 percent, from 0.67 percent in the first quarter of 2017 to 0.96 percent so far in 2018. 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 last year. The average 30-year fixed rate mortgage was at 4 percent in 2017, then rose to 4.2 percent in the first quarter of 2018, according to the National Association of Realtors. And it’s expected to head up to 4.4 percent for the year.
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.
This year is expected to bring even more rate hikes. On Wednesday, the Fed signaled it would likely raise rates twice more in 2018, plus three times in 2019.
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 has been updated to reflect the outcome of the March 2018 Federal Open Market Committee meeting.
December 12, 2017