Last month the Federal Reserve announced plans to raise short-term interest rates to between 0.25% and 0.5%—a move that affects millions of people’s lives.
The good news for consumers is that this is a small hike. If you have no or low debt, the rate hike probably won’t affect you significantly. But the average U.S. household, which carries $15,355 in credit card debt, has already been impacted by higher monthly interest rates.
At Prosper Marketplace, we’re dedicated to helping people achieve financial well-being, so we wanted to understand how consumers felt about the hike. We surveyed more than 500 Americans about the rate increase and found that nearly half of respondents didn’t know that rates had gone up.
In other words, our survey suggests many Americans are totally unaware of the recent Fed interest hike, which means they’re actually paying more for their previous debts — as well as for future purchases they make with a credit card — without realizing it.
Why the Fed Decided to Raise Interest Rates Now:
In 2008, the Fed lowered short-term rates to nearly zero as a response to the financial crisis. Now that the U.S. economy has rebounded and job rates are nearly back to 2007 levels, the Fed has decided to begin gradually raising rates to increase inflation to healthy levels (about 2% per year) and protect against future risk.
These higher short-term interest rates also affect individual consumers.
How Higher Short-Term Interest Rates Could Affect You in 2016:
If you have credit cards, your interest has already gone up
Now that short-term interest rates have gone up, so has the average interest on credit cards. The credit card interest is now the highest rate in three years, meaning everyone with credit card debt is now paying more for their previous purchases.
It’s always in consumers’ best interest to consolidate high-interest debts if it means paying less in fees and interest. Consolidating high-interest debt via a marketplace lender, such as Prosper, can help save consumers money because rates are often lower than a credit card.
Your savings accounts won’t see much benefit
With higher interest on credit card debt, it may seem like individual savings accounts would see higher interest as well. With recent interest on personal savings accounts being so low—typically less than 1%—higher interest on savings would motivate consumers to save. While the higher short-term rate will likely trickle down to personal savings accounts, the increase is small enough that it won’t have much effect on most people’s savings.
Mixed news on mortgages
Home mortgages are a major source of debt for many Americans. Those who already have fixed-rate mortgages won’t see any rate increases. However, variable-rate mortgages will see higher interest rates as will new mortgages of any kind.
Loans may be easier to get—but check those interest rates
Higher interest rates mean that debts are getting more expensive, whether it’s a $5 latte on a credit card or $50,000 to make home improvements. Higher interest rates also means that banks may be more willing to issue credit. While lending has rebounded to a certain extent since the financial crisis, credit has remained limited in some areas.
Don’t jump the gun, though. Remember—interest rates have just gone up. Loan seekers should still shop around for the most competitive rates, which may not be offered by traditional banks.
Foreign travel and goods could get cheaper
The Fed’s goal for carefully controlled inflation could make for a stronger dollar—as long as other major economies don’t tighten their economic policies. That means that U.S. travelers abroad could benefit from more favorable exchange rates. It would also mean that certain foreign imports could get cheaper.
The bottom line is that the Fed’s recent interest rate hike won’t have a major impact on your finances unless you have a high balance. That said, regardless of how much debt you have, the changes that happen on a macroeconomic scale affect all of us to some extent. The more you know about how these changes impact you, the better you can plan for financial well-being.