Research of the Week; Another Interest Rate Hike Could Mean Higher Costs for You

The second rate hike of 2017 is bad for anyone carrying debt, but good for savers.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The event

The Federal Reserve announced Wednesday that it would raise the key rate by another quarter of a percentage point. It’s the second time the Fed raised rates in 2017 and the third time since December of last year. As a whole, the primate rate has risen 0.75% in just over half a year.

The big result

When the Federal Reserve raises the key rate, it affects interest rates on a variety of consumer products. Higher benchmark rates are good for savers because your savings can grow faster. On the other hand, interest rate hikes are bad for borrowers because they increase the cost of repaying debt.

Expect higher costs following the latest interest rate hike

The fascinating details of what this interest rate hike means for you

For credit card users…

A higher benchmark interest rate usually means higher APR on all your accounts. Most credit cards have variable interest rates (fixed rate cards exist, but they’re rare). According to a NerdWallet report on MarketWatch, at the previous rate average total interest charges were $1,292 per credit user. Now with the new increase, total average interest charges will rise to $1,309.

A separate report from Bankrate in USA Today says average credit card APR is now 15.07%. Keep in mind that rate applies to all cards; reward credit cards and cards for people with bad credit tend to have higher rates. If you have a $5,000, a .25% increase in your rate would add $175 in additional interest charges.

The MarketWatch report explains you can expect your interest rates to increase within the next two billing cycles. Watch your interest rates over the next 60 days to assess the impact on your accounts.

For HELOC borrowers…

If you have a Home Equity Line of Credit (HELOC), the rate will also increase. Per the USA Today report, this will only raise the minimum monthly payment requirement by $6. However, total interest rate increases since December mean your HELOC costs about $18 more per month now.

HELOC borrowers should expect the rate hike to hit them within the next 3 weeks.

For mortgage holders…

If you have a fixed-rate mortgage already, then interest rate hikes don’t really affect you. Your rate is locked in at the time of purchase. Rates on new fixed-rate loans are higher now. If you plan to buy this year, you may want to do it sooner rather than later. The Federal Reserve states that they may raise rates again this year and into next year.

If you have an adjustable-rate mortgage, then this Federal Reserve increase will affect your loan. However, you won’t see the impact until next year. ARMs have annual rate adjustments, so any rate increases that happen this year will hit you next year. You can expect your monthly payments to increase by $84 next year thanks to this hike.

For savers…

If you’re actively saving money, all these interest rate hikes should be music to your ears. While rate hike increase costs for debtors, then increase growth and yield for savers. The interest rate hike will increase the rate on:

  • Savings accounts
  • Money Market Accounts
  • CDs
  • Interest-earning checking accounts (yes, those exist)

Of course, for a basic savings account, the rate increase ends up being less of an increase than the benchmark rate. At most, your 0.10% savings account interest rate may increase to 0.15%. Keep in mind that most savings accounts have rates of less than 1%; some have rates as low as 0.01%.

What you can do

“As interest rates increase, it’s much better to be a saver than a borrower. So, it’s the right time to prioritize faster debt elimination so you can boost your saving strategy,” explains Gary Herman, President of Consolidated Credit. “Since credit card interest may increase significantly, it may be wise to consolidate your debt. That way, you can achieve the lowest interest rates possible to make repayment faster.”

See how much a few percentage points affects total cost

Use the calculator below to see how much increasing your interest rate can affect your credit card debt. Enter your current balance and current interest rate. Then increase the rate to see if it affects your total cost and payoff date.

See how much an interest rate hike affects your savings

Use this simple savings calculator to assess the positive impact of a rate hike on your savings. Enter your savings balance and monthly deposit amount, then play around with the interest rate to see how much more you can earn.