The Fed just raised rates today, just as expected. As you may know, financial pundits keep close tabs on the Fed and what it does with interest rates. But what about you? Why should you care? A USA Today article by Paul Davidson outlines the importance of rate hikes to your personal finance. Here’s a summary of what he has to say:
Credit Cards and Rate Hikes
Credit card companies are in the business of making money by charging interest on the loans they make to you when you use their card. A Fed rate hike increases the cost of money to these firms. They will pass this cost onto you in the form of credit card rate increases. Try to pay off your charges every month.
Savings Accounts and Rate Hikes
Banks want you to deposit money with them so that they can lend it out to others. They will pay you interest on the dollars you deposit with them. When they lend out money, they charge a higher rate than what they pay you, so they make money. Higher Fed rates means that banks can charge a bit more on the loans they make. This will enable them to pay you a little more on your savings deposits. Hurray!
Mortgages and Rate Hikes
Mortgages are longer term debt obligations and are not as affected by hikes in short-term interest rates as they are by other parameters such as inflation expectations or the long-term economic outlook. It is likely that fixed-rate mortgages will be only slightly affected by the Fed’s recent action. The rates on adjustable-rate mortgages are reset periodically over the life of the loan, and these may be affected, especially if the Fed continues to implement rate increases.
Car Loans and Rate Hikes
Existing auto loans will be unaffected but any new loans made by banks or car dealers are likely to have higher rates than before, but maybe not too much more. According to sources in Mr. Davidson’s article, competition among auto loan lenders is likely to hold down rates on these loans.
So you see, many of the items than are in our everyday personal finance world are affected by the Fed’s interest rate manipulations. In some cases we gain, in other cases we stand to lose. Knowing how rate increases or decreases can affect these items ahead of time will enable you to plan more effectively.