As was expected, the Federal Reserve announced on Wednesday, June 14, 2017, a quarter-point hike to the interest rate, the second such hike this year. A third interest rate hike is expected later this year. Expect to see three rate hikes for each of the next two years.
That means that over the three year span, interest rates will go up a total of 2.25%.
Your debt is getting more expensive.
Bad News for Variable Interest Rate Debt
The typical 15 or 30 year mortgage is a fixed rate, meaning that it does not matter what interest rates do in the future – you are locked into your rate. It’s why so many people went out to purchase or refinance their homes in the past few years, while interest rates have been at “historically low levels.” (Seriously, how many times have you heard that over the past few years?) The interest rate hikes are only going to affect you if you are taking out a new loan.
But many people have an ARM to finance their housing purchase. The Adjustable Rate Mortgage means that at some point, the interest rate will reset based on the then current conditions. So if you have a 5 year ARM that resets next year, you should expect to have a higher interest rate than you do today. And that means higher housing payments. Can your budget afford this?
The good news for those with ARMs, the mortgages usually only reset once a year or once or twice in the lifespan of the loan. You may not see the effects for awhile. But when you do see the new interest rates kick in, it might be quite a shock to the system as several rate hikes add up together.
On the other hand, interest rate adjustments can become effective in very short periods of time for both credit cards and HELOCs (home equity line of credit). Sometimes these changes are effective within weeks. So you may not notice a few dollars here or there but it’ll be like death by a thousand paper cuts when you check your budget a year from now.
Show Me The Numbers
The current credit card interest rate, as of June 14, 2017, is 16.5% variable, according to Bankrate (follow link for current rates). The average balance-carrying debt per household is $16,048, as of May 2016. So for the average American with a credit card balance, they are looking at an additional $71.67 in interest over the life of the balance on a three-year repayment plan, assuming no new charges.
While that may not seem like a lot, remember we are likely to see another hike before the year is over and possibly three more hikes a year through 2019. For every quarter point hike, it’s another $71.67. By the end of 2019, you could be looking at an extra $500 in interest on your credit card debt if you don’t get it paid off.
Credit card debt is bad. And with rising interest rates, credit card debt is even worse and becomes harder to pay off. If you have variable or high interest rate debt, use this news as a reason to prioritize your debt repayment over the next few months and years!
It’s Not All Bad
Remember the days of 4 and 5% interest rates on your savings account? That’s because the federal rate was higher, letting banks charge more for all the loans they were giving out. Which meant that they were making more money and could attract your money with higher interest rates. So, if you don’t have any debt, especially variable interest rate debt, then you could see higher returns for your savings!
Typically, savings account interest won’t make you rich, but a little extra for putting money in the bank won’t hurt, right?