It’s been an eventful end to 2016 for Federal Reserve chairwoman Janet Yellen and company, as the Fed raised its benchmark interest rate last week for the second time since last year.
Maintaining positive changes to the U.S. economy and employment growth since the Great Recession of 2008, the Fed’s quarter-step rate increase from 0.5% to 0.75% continues an upward climb started last year, when it moved the target rate range from 0.25% to 0.5% in December 2015.
Such a small, low climb up the rate scale may not seem like much, but analysts believe ratcheting up even a fraction of a point may affect millions of Americans financially. We’ve already talked about how rising interest rates -- no matter how minuscule -- can affect your credit score, but what other kinds of impacts can you expect?
Here’s what to brace for in 2017:
Deposit and savings rates will remain steady
A federal interest rate increase should be exactly what anyone with a savings account is looking for. The current national savings account APY is only 0.06%, according to the Federal Deposit Insurance Corporation, leaving account holders wanting (and deserving) a better rate of return on their cash deposits.
At 0.75%, consumers may need to wait for interest rates to trickle down to their level. Banks, credit unions and other financial institutions are quicker to impose their own rate hikes on products like credit cards or loans -- where interest is owed -- instead of deposit accounts, where interest is paid. If an interest rate increase poses an effect on savings accounts, it could take one or two years, according to experts.
In the meantime, experts suggest seeking out an online savings account, or a comparable long-term savings vehicle, like a certificate of deposit, which can carry APYs of a percentage point or higher.
Some mortgage rates may be on the move
If you already have a fixed-rate home loan, your interest rate is locked in for 15 to 30 years, so rate changes won’t have any effect on you unless you go to refinance down the road.
Mortgage rates can be tricky when it comes to how an interest rate shift influences them. It’s usually a combination of rate changes, inflation and economic conditions, though home loan rates are often linked to yields on long-term, 10-year treasury bonds, which themselves have seen an increase of nearly one percentage point since the most recent presidential election.
Watch out if your mortgage is variable or adjustable, where interest rates fluctuate according to changes in the market. These may be most vulnerable to some slow percentage point increases. The current average adjustable mortgage rate is around 3.45%, so take into account that some of these factors could raise your rates and your monthly loan payments.
Auto loan rates could drive up
Interest rates on auto loans have already begun to rise in response to the Fed’s recent rate hike decision, since they tend to rise or fall relative to the current federal rate range.
But if you’re in the market for a new car this year, don’t let an interest rate increase discourage you from financing a new vehicle. Considering the brief duration of most car loans (48 to 72 months compared to a 30-year home loan, for example), a single interest rate increase isn’t likely to make much of a difference on your monthly car payments or expenses in the long run.
Federal prime rates notwithstanding, your credit standing is the biggest determining factor in securing a low APR on an auto loan. You can control the type of interest rate you secure by taking the steps to improve your credit score, negotiating with the dealer, and shopping around instead of settling for a loan offer that doesn’t suit you or your financial needs well.
Student loan rates may see some changes
Federal student loan interest rates are fixed for all student borrowers regardless of their credit score or history, so the main factors to consider when taking on student debt, whether it’s subsidized, unsubsidized, Perkins or Stafford loans, is to weigh the amount borrowed and terms of your loans against the current standard interest rates, which have remained low -- 3.76% undergraduate, 5.31% graduate unsubsidized, 6.31% graduate PLUS.
Those rates could still rise for future student loan borrowers. Since rates are federal, they’re also linked to long-term Treasury rates, so if benchmark rates rise, student loan interest rates may see an effect in the near future. Private loan rates, which vary from lender to lender, may also rise in response to the Fed rate hike, so borrowers should first exhaust all their federal lending and financial aid options before signing up for a private loan.
Expect effects to credit card rates
Variable credit card rates average at 16.23% this week; at a steady double-digit number, current rates are much harder to manage when compared to the likes of low-interest student loans or most mortgage and auto loans.
If you pay your credit card balance off each month on time, your account’s interest rate won’t affect the amount you owe. But it’s still worth keeping in mind that the Fed’s newest interest rate could still pose an uptick in credit card rates (remember, credit accounts are likely to see increases in interest rates as opposed to savings and deposit accounts).
The problem with such an increase isn’t the immediate penalty APR you might incur from one month to the next, but that left neglected, an outstanding balance will begin accruing and compounding interest at the new, increased rate, raising your chances of going into debt. Avoid using more credit than you can afford to pay off, keep your credit utilization to 30% of your credit limit, and pay your full, current balance by the due date to avoid any interest rate impacts to your finances.
Donald Trump may encounter problems with the Fed
Once he’s officially inaugurated next month, President-elect Donald Trump may end up butting heads with the Fed in light of its recent decision to raise the interest rate benchmark.
With Trump promising a stronger economy, better infrastructure and more spending for his upcoming White House tenure, analysts predict that this could drive up demand for certain goods and services, and the Fed could consider raising rates further to keep up with the quick pace of inflation.
And if rates increase further, some of the above impacts could be heightened even further for anyone looking to keep their finances in order. So while growth is good, higher interest rates -- at least at the federal level -- may or may not be a positive for consumers.
To avoid interest rates overtaking your finances, always keep your credit in good shape to secure the lowest rates possible in spite of what national or federal benchmarks state. Pay off credit card bills in a timely manner to sidestep penalty fees, charges and APRs. And devise an expert budget that allows you to pay down your credit and loan account interest early, putting less strain on your financial health.
Image: Kurtis Garbutt