Interest rate hike: What good comes out of bumping up the key rate?


Interest rate hike: What good comes out of bumping up the key rate?

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Susan Walsh
In this Feb. 24 file photo, Federal Reserve Board Chair Janet Yellen prepares to testify on Capitol Hill in Washington, before the Senate Banking Committee. The financial world’s worst-kept secret is that the Federal Reserve is all but sure to raise interest rates from record lows, on Wednesday, Dec. 16, 2015. The uncertainty is what the Fed will say about how much and how fast it expects to raise rates again in coming months. (AP Photo/Susan Walsh, File)

The Federal Reserve announced Wednesday that it will be increasing the key rate – the interest rate that determines bank lending rates and the cost of credit -- by a quarter of a percentage point.

It is the first increase in the rate in nine years, and signals a growing confidence in a strengthening economy.

Here is a quick look at what an increase in interest rates could mean to you.


The cost of borrowing to buy a home will go up, but only slightly to begin with. The average rate for a 30-year mortgage is around 3.8 percent now – this time last year it was around 4.3 percent. If the Fed increases rates again soon after the first of the year – as many believe they may – you may see more of a pinch. The increase in the interest on a mortgage payment for a home loan of $225,000 would be about $25 per month.

The flipside is that credit can become “looser” or more easy to get. With higher interest rates, banks may be more willing to issue home and other loans – they will make more money.

Auto loans:

They will go up, too. But again, the effect will not be dramatic and will likely not be seen for the next few months. With manufacturers' incentives including zero interest rate loans and the typical five-year loan at around 3 to 4 percent, consumers may not see a big hit to the wallet.  If the Fed should raise interest rates up to 1 point by the end of 2016, it would add about $16 a month to an average $25,000 car loan.

Saving accounts:

You may have more incentive to save if interest rates are increased. Why? Because you will earn more money on your savings.

Credit cards and home equity loans:

Here is where you can see a more immediate effect. Credit cards and home equity loans have variable rates – rates that are not set -- but are tied to the Prime Rate. The Prime Rate is the interest rate charged by top U.S. commercial banks to their best customers. You can expect to see an immediate increase in the interest rate on credit card balances. The increase in the interest owed on credit card debt if the Fed raises the interest rate a quarter of a point would be minimal, depending on how much you owe. An example from Forbes: If you owe $5,000 and have an interest rate of 15.25 percent and your monthly payment is 113.54 (principle and interest), then the payment would increase to $114.58 per month if the interest rate is hiked .25 percent to 15.50 percent.

Retirees could see more:

Those depending on investments for their retirement income could be happy with a higher interest rate as retirement savings would benefit.

"Loans that are linked to longer-term interest rates are unlikely to move very much," Fed Chair Janet Yellen said at a news conference Wednesday. "Credit card rates ... might move up slightly. But remember, we have very low rates, and we've made a very small move."


Sources: Forbes; Federal Reserve; Investopedia; Associated Press

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