5 things Federal Reserve interest rate hike means for your wallet

Consumers tend to pay far more attention to the swings in their March Madness brackets than the latest moves by the Federal Reserve.

But the reality is the Fed’s action last week will have more lasting impact on your wallet.

The Fed moved to raise rates by 25 basis points, as expected. The Fed’s benchmark interest rate increases to 1.5 percent to 1.75 percent.

“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the Fed said in its statement Wednesday.

“Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”

Going forward, consumers will continue to see an uptick in the cost of borrowing on everything from credit cards to car loans to mortgages.

This is the first rate hike of 2018 but it’s not the last, according to economists. Another two or three rate hikes are anticipated for this year, according to Robert Dye, chief economist for Comerica Bank.

“Higher interest rates are negatives for most households,” Dye said.

But the U.S. economy has much going for it on the upside — strong job growth, rising home values, some wage growth, higher consumer confidence and a federal tax cut that is putting more money in many wallets.

“I think the positives will outweigh the negatives this year and we will see a strong year for non-auto consumer spending,” Dye said.

Here are some things to pay attention to now in a rising-rate world:

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1. Budgets, unlike college basketball brackets, aren’t likely to be busted

The theory is that the Fed has room to raise rates because the job market is so strong. As wages rise, consumers may not be under so much pressure to borrow or they’d be able to afford slightly higher rates.

And rates are expected to climb gradually. So consumers still have time to refinance or borrow earlier in the year to avoid higher rates later on down the road.

Mark Zandi, chief economist for Moody’s Analytics, said his expectation is that mortgage rates and car loan rates will be up by at least a half a percentage point a year from now. For savers, new CD rates are expected to be about a quarter percentage point higher a year from now.

“The economy is set to boom,” Zandi wrote in a report this week. “Growth is already strong — well above the economy’s potential — and will soon accelerate. A massive dose of fiscal stimulus measures, including both deficit-financed tax cuts and federal government spending increases, has just begun to hit the economy.”

2. Consumers aren’t stressing out

Policy wonks and bankers keep a close eye on all things Fed. But a recent NerdWallet survey indicated that 62 percent of respondents claimed that they didn’t know the Fed raised rates last year. The Harris Poll on behalf of NerdWallet surveyed 2,000 U.S. adults ages 18 and older.

As of Wednesday, the Federal Reserve will have raised rates six times since December 2015. The Fed raised rates three times in 2017, once in 2016 and once in 2015.

3. Borrowing costs aren’t sky high

Mortgage rates rose for a good part of 2018 on strong jobs reports. The average 30-year fixed rate has gone up to 4.54 percent from 4.15 percent in early January, according to Bankrate.com.

“Borrowing costs are still relatively low, but moving higher and that’s why consumers need to get out of variable rate debt and lock in fixed rates to insulate themselves from further increases,” said Greg McBride, chief financial analyst for Bankrate.com.

McBride said he’s expecting mortgage rates to remain around 4.54 percent by year end but he’s expecting plenty of volatility. At some point, mortgage rates could drop significantly from here if geopolitical issues arise or the U.S. economy slows down.

As for other rates, McBride said he’d expect the average five-year car loan rate to be 4.85 percent by year end, up from 4.46 percent now.

Consumers aren’t seeing anything close to the average 8 percent for a car loan consumers faced in January 2006, according to Jessica Caldwell, executive director of industry analysis for Edmunds.com.

Savers are likely to see higher rates, too. McBride expects the average rate on a one-year CD to be 0.7 percent by year end, up from 0.49 percent now. The average rate on a five-year CD is expected to be 1.5 percent by year end, up from 1.10 percent now.

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4. Ignoring the trend toward higher rates won’t help

As rates edge higher, savvy consumers will want to take extra care to shop around for loans and CDs.

Making sure to pay bills on time — and not get overburdened with debt — will help keep credit scores higher and borrowing rates lower for individuals.

The average rate for credit cards is the highest ever 16.84 percent — and those rates would edge even higher once the prime rate goes up, according to McBride.

“But consumers with good credit can still get 0 percent offers for purchases and balance transfers that last as long as 15 months,” McBride said.

The key, of course, involves maintaining a strong credit score.

Charlie Chesbrough, senior economist for Cox Automotive, noted that rates on car loans are near five-year highs. But rates remain relatively affordable, particularly for those with good credit.

“Higher lending costs impact car buyers in different ways,” Chesbrough said. “For customers with good credit, the monthly payment on a $35,000 five-year car loan will rise about $15 a month from a 1 percent interest rate increase.”

Consumers with lower credit scores are seeing much bigger rate hikes on the car loans they’re taking out.

“Assuming a continuation of credit tightening, subprime borrowers will see much larger cost differences,” Chesbrough said.

5. Consumers can control some borrowing costs

Most credit cards have variable rates and the interest rate goes up every time the Fed raises rates. Most home equity lines of credit have a variable interest rate that’s tied to the prime rate. The prime rate goes up when the Fed raises short-term rates.

“Variable rate debt such as credit cards and home equity lines of credit will only cost more as interest rates rise,” McBride said.

“Transfer balances to low rate cards, refinance into a fixed rate home equity loan, or just pay down the debt aggressively. But do it now.”

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