2018 has been a year of interest rate activity like Americans have not seen for quite a while. The Federal Reserve opted to raise the rates to 2.5% in 2018, 3.0% in 2019, and 3.5% in 2020. While great news for savers, this hike in federal interest rates will add pressure on consumers’ borrowing costs. It affects everything from car and home loans to credit card interest rates and student loans. Here’s how the interest rates affect different consumer sectors.
Credit card interest rates are usually varying and have a direct connection to the Fed’s benchmark rate. So, if you have outstanding credit card debt, you could be seeing a hike in your monthly interest rate. The average American has about $6,375 of credit card debt. If you have good credit you may be able to transfer your balance to a 1 year, 0% interest card to help offset some of the immediate changes.
While fixed-rate mortgages won’t be impacted too much, adjustable rate mortgages will see a spike. The Federal interest rate doesn’t directly affect mortgage rates, it does influence other factors such as the 10-year Treasury bond. If you have an adjustable rate mortgage, you might want to speak to your lender about switching to a fixed rate mortgage before rates increase further.
Private Student Loan Facts states that of the $1.2 trillion dollars in outstanding student loan debt, $91 billion is from private lenders. When the Feds raise the rates, borrowers will have to pay back more in interest. With this current increase, borrowers with existing variable rate interest loans can expect to see their rates go up by 1%. It’s a great time to look into refinancing any variable-rate loans. There are still plenty of opportunities to save while interest rates are rising.
The con of rising interest rates is that car loan interest rates will increase, which means fewer people may be buying new or used cars. On the other hand, increased inventory levels may mean that the sticker price of cars may drop to continue moving inventory. Fortunately, car loan interest rates aren’t expected to take a hike as severe as the other areas like credit cards, home loans, and student loans.
One area where rising interest rates are beneficial is savings accounts. The average rate on a money market account is currently 0.18% according to Bankrate. With increasing interest rates, you’ll be able to earn a little bit extra.
As interest rates rise, you can almost guarantee that stock prices will fall. This is in part because increased borrowing costs reduce corporate profits. Essentially, investors have less to invest. Keep your eye on the market and consider investing your extra cash into something less volatile.
A CD is a pretty safe place to keep your money while you let it net interest. Higher inflation expectations will put pressure on rates for CDs, which means you should start shopping around for the best deals now. The APY on CDs is expected to grow over the course of the year.
Even though the first installment of increased rates has already occurred, there are still plenty of opportunities to save money in a rising interest environment. Staying well informed, not being afraid to renegotiate interest terms, and shopping around for the best rates will allow you to save money and potentially earn some extra cash as well.