The Federal Reserve Board just announced it will raise its key rate a quarter point after lowering it to almost zero on Dec. 16, 2008. People have been speculating for months about when this would happen, but the action finally occurred Wednesday.
"About 97% of business and academic economists surveyed by The Wall Street Journal in recent days predicted Fed officials will raise the benchmark federal-funds rate Wednesday," the WSJ reported earlier this week. For consumers, the rate hike could mean a variety of things.
What It Means for Loans & Credit Cards
If you have a credit product that has a variable interest rate, you can expect that rate to increase, said Jeffrey Christakos, a certified financial planner with Westfield Wealth Management in New Jersey. For example, if you have credit card debt on a card with a variable rate, that could affect your plan to pay it down or get out of debt generally.
"It depends on what credit card you have and what your credit rating is and things like that, but if it's subject to a fluctuating rate, the increase in the [benchmark] rate would definitely have an impact," Christakos said. "[For] those that have outstanding balances, it makes it much harder to pay off the balances."
The same goes for loans with variable rates. A common one is a home equity line of credit (HELOC). Scott Sheldon, a loan officer and Credit.com contributor, explained how the Fed's actions could affect people with HELOCs:
"Should the Fed raise interest rates this month, HELOC payments for many will likely rise. …The Federal Reserve typically will change the Federal Funds Rate in a series over time to avoid jeopardizing the economic recovery, so payments won't rise dramatically in the short-term. However, the increase should be enough to cause worry — especially for homeowners who scour over every line item of their monthly bills."
What It Means for Your Assets
On the other hand, if you have financial products that earn interest, "you're going to come out ahead," Christakos said.
"401(k) accounts invested in bond funds will have a temporary … decrease in value, but will start to see dividend yields go up," said Robert Wesley Shannon of SJK Financial Planning in Texas. That temporary decrease would be about six months, he wrote in an email.
How to Prepare
Remember, any effects a rate hike may have on loan interest-rates in the long-term can be mitigated by a good credit score. Stellar credit generally entitles you to the best terms and conditions on new loans and can be handy in potentially negotiating new interest rates on certain old ones, like a credit card. You can see where your credit stands by viewing your two free credit scores each month on Credit.com.
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