Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 1.75 percentage points, from 0.25% in December 2015, to 2.00%. The Fed is expected to raise rates another 25 basis points on Sept. 26.
MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. In short, we find Fed rate changes have wide-ranging implications for consumers.
Letâ€™s take a closer look at how the Fed rate hike impacts different financial products:
Most credit cards have a rate thatâ€™s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 1.92 points, roughly in line with the Fedâ€™s increase of 1.75 points.
That said, consumers can still find attractive introductory rate offers.
For example, 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.
Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.
The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.
The danger of such a small increase in the monthly payment is complacency. Remember that by paying the minimum due, you could be in debt for more than 20 years.
Rates are expected to keep rising, so it makes sense for consumers to lock in a low rate today. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.
On average, savings account rates havenâ€™t changed much since the Fed started raising rates. Thatâ€™s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers donâ€™t shop around to find higher rates at online banks and credit unions.
Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fedâ€™s rate hikes work in your favor.
Back in 2015, it was rare to see savings accounts pay 1% interest.
Today, many online banks are competing for deposits by offering savings account rates approaching 2%, flowing through about half of the Fedâ€™s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data: In the 12-month period ending June 2018, depositors earned $26 billion in interest on their savings accounts, versus the $10 billion they earned in 2015.
CD rates have moved faster than savings rates, up 0.19 points for 12-month CDs since the Fed started raising rates. Thatâ€™s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.
But that rate rise doesnâ€™t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.
The rates on 1- and 2-year CDs at online banks have been increasing rapidly, and are now well over 2%, reflecting much of the Fedâ€™s rate increases since 2015.
The rates on 5-year CDs have not been increasing as quickly. As a result, the rate curve has been flattening.
A reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.
And if long-term rates start to rise, you can redeploy or build a ladder in a year.
Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 5.05%, up from 4.30% before the federal funds target rate began to rise.
Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.
For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.
Personal loan rates tend to be driven by many factors, including an individual lenderâ€™s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.65 basis points.
Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.
But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.
Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage rate has increased from approximately 3.9% to 4.6% as of Sept. 13. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate increases, and itâ€™s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.
Rates are only going to go up. That means life is going to get more expensive for debtors, and more rewarding for savers.
If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.
If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.
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