Rising Rates: What It Means For Your Money

This article was recently published in CommunityAmerica's "Let's Talk Money" section of the Kansas City Star.

 

With the Federal Reserve actively raising the federal funds interest rate, you may be wondering what this number means and how it affects your accounts. This number is the basis for the prime rate which serves as the starting point for financial institutions in setting interest rates. From mortgages and personal loans to credit cards and savings, simply put, you may soon see some changes to your borrowing and savings accounts. Here’s a look at why the Fed is raising rates and what it means for you and your money.

Why the Fed is Increasing Rates

The Fed has a target inflation rate of 2%. Over the past two years, the inflation rate – which is the rate at which prices have increased over a given period of time – has continued to rise due to the COVID-19 pandemic, supply chain disruptions, and the ongoing war in Ukraine, and it now steadily sits at the highest it has been in 40 years – over 8%. The hope is that a bump in the federal funds rate will eventually help in stabilizing the rate of inflation. History tells us that raising the rate will lead to a hike in interest rates as a whole, which would make it more expensive for companies and people to borrow money. This would eventually slow down the overall demand for goods and services, allowing the market to catch back up to the target inflation rate.

How Consumer Loans will be Affected

Unfortunately, while this may help the overall market, it can also impact the interest rate you have for consumer loans with variable rates (such as personal lines of credit, credit cards, and home equity lines of credit). This means you will likely see an uptick in interest rates in the coming weeks and months. For example, credit cards often have variable rates, so you will find yourself paying more on your credit card balances if and when these rates do rise. If the thought of rising credit card rates causes you to worry about how much card debt you’re carrying and what your monthly payment will look like, it might be worth considering these debt consolidation tips or talking with a financial advisor to discuss your options.

A Home Equity Line of Credit is another product worth discussing when diving into the effects of the Federal Reserve rate hike. As interest rates climb, now might be the perfect time to lock in a fixed rate on your outstanding home equity balances, if you have that option. Home Equity rates are going to be very reactive – especially in this rising rate environment – so locking in your fixed rate now may help you save some money on interest and payments in the long run. It is also worth noting that if you have been wanting to access your home’s equity, a Hybrid Home Equity would be a great option compared to a cash out refinance because a home equity line of credit will allow you to keep your current, low mortgage rate while still allowing access to your home’s equity.

How Savings will be Affected

While the rising federal funds rate might have a negative impact on consumer loans, the opposite can be said for savings accounts. Again, history tells us that rates for deposit accounts typically jump when the federal funds rate is increased – but this can depend on the type of accounts you have and the institutions you are doing business with. While deposit rates do typically rise after the federal funds rate is increased, there are other factors that institutions must take into consideration before increasing their rates such as supply and demand for or the institution’s need to bring in more revenue. It is important to investigate and take advantage of everything your financial institution has to offer so that you are making the most of your hard-earned money. Stay up to date on interest rates, deposit accounts, fees, etc. and talk with a financial advisor to make sure your money is in the right place.

While history can serve as a good indicator of how things will play out after a Federal Reserve rate hike, there are still a lot of uncertainties. We suggest sitting down with a financial advisor to discuss your financial picture to ensure you are on the right path to achieving financial peace of mind in this ever-changing environment. Have questions? Stop by your nearest branch or schedule a free appointment to speak with a CommunityAmerica financial advisor — and stay up-to-date on our current rates.