Americans are taking on more debt, and they’re soon going to be paying more for it.
The Federal Reserve on Wednesday raised its benchmark interest rate — to a range of 1.50 to 1.75 percent — citing an improving economy, low unemployment and rising wages.
The move will affect millions of Americans by making it more expensive to borrow money, whether that’s in the form of credit card balances, car loans or some home mortgages.
This may mean the time is ripe to make a big purchase before interest rates go higher. The Fed already has promised two additional rate hikes this year and more in 2019 as its benchmark federal funds rate climbs from historic lows during the Great Recession.
But there’s also a silver lining for savers. Because interest rates have been low for years, it’s been tough to gain much extra ground in the form of interest when stashing away cash in savings accounts.
The Fed’s move will make it easier to accrue interest on a nest egg or rainy day fund.
What comes first
You’ll probably see the first sign of rising interest rates on your credit card bill within a few weeks, said Tendayi Kapfidze, chief economist for loan comparison site LendingTree. That’s because credit card companies generally offer variable interest rates that are adjusted in real time according to the prime rate, or the interest rate charged by most major banks to their corporate customers.
The federal funds rate and the prime rate are tightly linked, and as one goes, so the other tends to go.
The increase in the federal funds rate announced Wednesday — 0.25 percentage points to a range of 1.5 to 1.75 percent — won’t make a huge impact for most people right away, Kapfidze said, but it will add up for those who carry a balance and pay only the minimum required.
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The average U.S. consumer’s credit card balance is $5,644, according to CreditCards.com, which would mean just $14 extra in interest per year, on average.
But it would mean an extra $109 in interest until the balance is paid off if you paid only the minimum.
And the rate at which Americans are taking on more debt is rising across the board, according to a recent study from Chicago-based credit bureau TransUnion. While serious delinquencies are going down, average debt for car and personal loans, mortgages, and credit cards all rose between 2016 and 2017.
Home equity loans and auto loans with adjustable rates — most likely those made with a lender outside of the automaker — will begin to see higher rates next, Kapfidze said. Personal loan providers soon will catch up as well.
That’s why this is a critical time to shop around for the best interest rate on any debt you can, he said, especially with rates set to go even higher later this year.
Even though it may seem like a bad time to take on more debt, Lewis Jones, managing broker of Coldwell Banker’s Lakeview, Ill., office, said he’s advising clients to buy sooner rather than later.
“We’re advising clients to buy now — interest rates are still historically low,” Jones said, noting that potential buyer activity has been rising in the Chicago area recently with the arrival of spring.
“Whenever the Fed says interest rates are going up, (our clients) get a little nervous,” he said. “But on a 30-year (fixed rate) mortgage, (the higher rate) is really going to have a nominal effect.”
Interest rate hikes will have a greater effect on borrowers with adjustable rate mortgages.