Understanding the Rate Hike Impact on Your Debt and Savings

Here’s what clients of Consolidated Credit need to know about how the latest rate hike will impact your finances.

For the third time this year, the Federal Reserve has raised the benchmark federal funds rate. According to a report on CNBC.com, the Fed raised the federal funds rate by 0.25 percent. That brings the federal funds rate to 2-2.25%. That may sound like a small number and a small increase, but it can have a big effect on your bottom line. Here’s what you need to know about the rate hike impact on your finances.

What is a rate hike?

Expect higher costs following the latest interest rate hikeInterest rates on consumer debt are directly tied to the economy by the Federal Reserve. When the economy is weak, the Fed lowers the federal funds rate. This means that lenders and creditors lower their interest rates to encourage consumers to borrow. This helps spur the economy.

But during a strong economy, the Fed raises the federal funds rate to help combat inflation. In turn, lenders and creditors raise their interest rates, too. That’s why interest rates are higher now than they were if you’d gotten the same loan or credit card two years ago.

How does the rate hike impact consumer debt?

Anytime the Fed raises their rate, it can impact some of your existing debts, as well as any new debts.

Rate hike impact on new loans

Any new loans that you take out now will have a higher rate than what you could have qualified for last month. Keep in mind that the Fed has indicated that they will continue raising interest rates to help keep our economy strong. So, if you’re planning on taking out a new loan, you should consider getting organized, so you can apply soon. The longer you wait, the more likely you are to face even higher rates.

The good news for DMP clients is that you don’t have to wait for the end of your debt management program to get secured loans. If you want to buy a home or a car, you can do that while you’re still enrolled in the program. The only credit you can’t apply for is unsecured – personal loans and credit cards.

If you’re thinking of buying a home, we encourage you to talk to one of our HUD-certified housing counselors. They can help you make a customized action plan that can get you into the homebuying process as quickly as possible.

Rate hike impact on existing loans

If you have existing loans, the rate hike will only affect them if you have adjustable interest rates. For any fixed-rate loans, the interest rate is locked in, meaning it won’t change unless you refinance. But the rates on any adjustable-rate loans may increase the next times your loans adjust. Some adjustable-rate loans adjust periodically, such as every month. Other adjustable-rate loans known as hybrid loans only adjust once.

For example, if you have a hybrid 5/1 mortgage, that means that the interest rate will adjust once after five years. If your rate adjustment is coming up, then expect the interest rate on the loan to increase.

And bear in mind that even a small increase in the rate on a large loan like a mortgage will have a big impact. Even just a small increase could equal out to tens of thousands of dollars extra paid over the life of your mortgage. So, if you have an adjustable-rate loan, you may want to talk to your lender to see if you can refinance. If you can lock in a fixed-rate loan now, it will help you save money.

Rate hike impact on credit cards

Almost all credit cards have adjustable rates – fixed-rate credit cards exist, but they are extremely rare. So, credit users can expect their interest rates to increase within the next few billing cycles.

But for DMP clients, these rate hikes have less of an impact. The credit counseling team negotiated the rates on any credit cards you included in the program. The rate hike won’t impact those negotiated rates. For example, if your creditor agreed to drop your rate to 2%, it will stay at 2% as long as you remain in the program. The only way that a rate hike will impact a credit card included in the program is if you drop out. Then, the creditor may restore your original rates with any new rate hikes factored in.

So, the only credit card APR you need to be concerned about is on any card that you left out of the program. If you kept a credit card out for emergencies, then watch your monthly credit card statements. The creditor may notify you soon of an increase in your APR. If they do, make sure to keep that card paid off so interest charges don’t get applied every month. If you already have a balance, we recommend that you call client services at 1-888-294-3130 to add the card onto your program.

The best news about the rate hike? Now your savings can grow faster!

The rate hike impact on saving money is positive - your savings can grow fasterRate hikes aren’t good for borrowers because they mean higher interest charges. But on the flipside, rate hikes are extremely good for savers. Not only do changes to the federal funds rate affect consumer debt, they also affect consumer savings, too. Savings tools have APY – that’s the interest rate that determines how much money you make on an account. Just like higher APR means your debt costs more, higher APY means that you earn more.

So, higher interest rates are good news for savers, and since you’re in the process of paying off your debt, you can start focusing on saving. First, check the interest rate earnings on your current savings account. The national average is only around 0.2%.

However, with this latest rate hike, you can start to find savings accounts with better growth. As CNBC reports, you can find basic savings accounts with rates as high as 2.25%. If you save $1,000 at 0.2% then you only earn $2 after one year. If you save the same $1,000 at 2.25%, then you earn $22.50 in one year.

It’s good to note that savings accounts that offer faster growth with higher rates often have account requirements. For instance, you may be required to maintain a minimum balance of $1,000. But now that you’re getting your credit card debt under control, it should be easier to maintain financial stability. As a result, you can take advantage of better savings tools because you’ll have the funds and the budget stability to use them effectively.

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April Lewis-Parks
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