The Federal Reserve decided to raise an interest rate known as the Federal Funds rate by 0.25 percentage points on Wednesday.
The decision itself only changes the rate at which banks borrow from the Federal Reserve, but the ripple effects are substantial. Here’s what it means for you.
Expect it to impact credit card rates, the cost of buying a home, the rate of some private student loans, and the amount of interest you can make from a savings account. Those impacts occur in different ways and on different timelines — predictably, the ways that consumers benefit tend to take longer than the ways they get hurt.
Banks will now pay more to borrow money from the Fed, and they’ll be charging you more to borrow that money from them. In total, this hike could add $1.6 billion to credit card finance charges in the U.S., translating to about $14 extra per quarter to each household, according to WalletHub analyst Jill Gonzalez. If you have $1,000 in debt, a 0.25% increase equates to an extra $2.50 this year.
Mortgage rates tend to go up after the Fed raises rates. If you have a mortgage already, the impact depends on whether your mortgage is fixed-rate or variable rate. The vast majority of Americans have fixed rate mortgages, meaning the rate is locked in. But those with variable rates are likely to see rates rise, and they will have to pay more every month.
If you’re looking to buy a home, you will likely have to pay a higher mortgage rate. But that doesn’t necessarily mean you’ll have to buy a smaller or a less desirable house. Higher rates can force home prices down, because sellers must accept the fact that buyers will be paying more in interest, and can presumably afford less in principal.
Federal student loan rates are locked in, but private loans can rise, depending on the terms. It’s crucial to know whether you have a variable or fixed-rate loan from your lender. If it’s variable, it might be worth considering refinancing at a fixed rate, given that interest rates are expected to rise for the foreseeable future.
Rising rates might hurt borrowers, but they should be great for savers, right? Not so fast. Banks are notoriously tight-fisted with savings accounts, and the average money market account still yields only 0.11%, according to Bankrate.com.
That’s a whopping $1.10 for every $1,000. Online banks often have better rates, and are worth checking out. CIT Bank, Goldman Sachs, and Barclays all have rates of at least 1%, according to Bankrate.
Banks still haven’t raised savings rates from the last time the Fed raised its rate in December, according to WalletHub. So don’t hold your breath for them to raise it now.
“Banks set savings account yields based on a number of metrics, including the health of their loan portfolio, size of their cash reserves, and generally profitability,” according to Sean McQuay of Nerdwallet. “So far, I have not seen a significant upward shift in annual percentage yields due to the last several Fed rate hikes.