The Fed Hikes Rates Again — Here’s What You Must Do Now

federal funds rate effects
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The Federal Reserve announced today that it is raising its benchmark federal funds rate by 25 basis points, bumping it into a range of 1.75 to 2 percent.

This is the second Fed rate hike of 2018. And it’s the seventh hike since December 2015, which was the first post-Great Recession hike.

The Fed noted today that its latest information “indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” And experts expect more Fed rate hikes to come, even before 2018 is over.

With the federal funds rate’s proverbial pendulum clearly in the midst of an upswing, consumers can expect interest rates to generally follow suit. That’s bad news for many debtors and good news for savers.

So, one way or another, today’s rate hike will directly impact your wallet. Here are five examples of how rate hikes affect personal finances:

1. Credit card balances

Most credit card interest rates are variable, meaning they go up and down along with interest-rate trends as a whole. So, they climb when the federal funds rate rises.

According to WalletHub, the six rate hikes prior to today have cost credit card users an additional $8.23 billion in interest to date. And that number will rise by at least $1.6 billion this year due to today’s rate hike.

This stands to hurt: Folks who carry a credit card balance over from one month to the next.

If you carry over any portion of a credit card balance — as opposed to paying the balance in full — you will generally incur interest charges on that portion every month for as long as you carry the balance over.

How you can avoid the pain: If you have credit card debt, consider transferring your balance to a card with a zero percent interest rate. You can find one by using Money Talks News’ credit card search tool — select “0% APR” from the menu on the left.

Just note that zero percent rates are generally introductory offers, meaning they increase after a certain period, such as one year. So, you must also do everything you can to get out of debt as fast as possible.

This does not affect: Folks who pay off their credit card bills in full each month, thereby avoiding interest charges.

2. Fixed-rate mortgages

There is no direct relationship between fixed-rate mortgages (FRMs) and the federal funds rate, but interest rates for new FRMs are likely to move higher over time as the federal funds rate increases.

In fact, that is already happening: While mortgage interest rates dipped over the past two weeks, they are on the rise overall, according to Freddie Mac. For example, the average interest rate for 30-year FRMs in the U.S. was 4.54 percent as of June 7. That’s up from 3.89 percent just one year ago.

This stands to hurt: Folks who get a mortgage in the future.

Mortgage rates are still near historic lows but probably have nowhere to go but higher over the long term.

How you can avoid the pain: If you are considering buying a home, understand that the longer you wait to get a mortgage, the higher the interest rate you are likely to get. And the higher your rate, the bigger your monthly mortgage payment.

So, shop around for the best possible interest rate. Start by using Money Talks News’ mortgage search tool to get an idea of the rate for which you might qualify.

This does not affect: Folks who already have a fixed-rate mortgage.

Once you take out an FRM, the interest rate remains the same unless you refinance under different terms — which is generally not a good idea when mortgage rates are trending upward.

3. Adjustable-rate mortgages

An adjustable-rate mortgage (ARM) is tied to a benchmark index, such as the London Interbank Offered Rate, aka Libor. When the Fed raises the federal funds rate, those indexes tend to rise, too.

Like interest rates for fixed-rate mortgages, those for ARMs are also already rising overall. The average rate for a 5/1-year ARM was 3.74 percent as of June 7 — up from 3.11 percent one year ago.

This stands to hurt: Folks who currently have an ARM or get one in the foreseeable future.

As those benchmark indexes climb, so will the rate on your ARM — and the size of your monthly mortgage payment — the next time your ARM is scheduled to “adjust.”

How you can avoid the pain: Look into whether you will save money in the long run by refinancing. Now may be the best time to refinance, with rates near all-time lows but rising.

4. Other types of loans

Interest rates on other types of debt tend to rise over time as the Fed rate rises. They include auto loans, personal loans and home equity lines of credit, aka HELOCs.

This is already happening with auto loan rates, for example — they just hit a nine-year high, according to Edmunds. The average rate for new financed vehicles was 5.75 percent in May. That’s up from 5.04 percent in May 2017 and 4.17 percent in May 2013.

This stands to hurt: A lot of people who already have a loan or who take one out in the foreseeable future.

How you can avoid the pain: Do everything you can to pay off your loan ASAP, thereby minimizing the amount of interest you pay over the life of the loan.

5. Bank accounts and certificates of deposit

Bank accounts that pay interest, as well as certificates of deposit (CDs), tend to pay increasingly higher rates over time as the federal funds rate rises. Such bank accounts include interest-bearing checking accounts, savings accounts and money market accounts.

This stands to help: Most folks with money to spare.

How you can benefit: If you can maintain a minimum balance in your checking account but aren’t earning interest on that money, consider switching to an interest-bearing checking account.

If you have savings set aside, make sure you’re earning as much interest on it as your situation allows. That could mean moving your savings account to a bank that’s paying more for the same type of account, for example. Or, it could mean putting money in a CD.

There are multiple ways to land a higher interest rate on liquid savings. Check out Money Talks News’ account and CD search tool to get a feel for all the options out there right now.

Have you changed, or do you plan to change, any aspects of your financial life due to ongoing Fed rate hikes? Share what has worked for you by commenting below or on Facebook.

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