How the Federal Rate Increase Affects Savings Accounts & Loans

Federal Reserve Money

The Federal Reserve announced its first rate increase of the year, raising the benchmark federal funds rate to a range between 1.5 percent to 1.75 percent.

That’s highest it has been since the last recession that began in 2008.

To the average American, this rate change may sound like confusing financial jargon. But, it has a real effect on you and your finances.

Find out exactly how it can affect everything from savings accounts to mortgages and what you can do about it.

How Does the Rate Change Affect You?

The federal funds rate serves as a base for how financial institutions calculate the interest rates on their products.

A change in the benchmark rate will likely lead to changes in rates across on the different types of financial accounts that you already have or are considering opening in the near future.

Great for Savers

Historically, when the Fed raises rates, the interest rates on deposit accounts increase as well -- making these products more attractive to savers.

This means the money that you put in the bank is growing faster.

Savings accounts

The effect of rate hikes is very apparent in high-yield savings accounts, such as those offered by online banks. Because online banks don’t pay massive operating costs to run branches and ATMs, they’re more likely to provide higher rates and lower fees.

Speaking of banks with a large physical presence, national banks don’t offer the best savings rates -- usually 100 times lower than online banks.

So, if you have a savings account from a big bank, you probably won’t see a big change in the interest rate since it is so low.

Money market accounts (MMAs) usually experience the same effects as savings accounts when it comes to rate changes.

What you should do: Consider opening an online savings account -- it’s one of our most recommended options whether rates are going up or down.

If you already have a high-yield savings account, sit tight and enjoy the increase in monthly interest earnings.

Certificates of deposit (CDs)

Like savings accounts, certificates of deposit will also pay out more interest to depositors.

Again, the biggest CD rate changes will be seen with CDs offered by online banks.

A notable difference is that the increase in CD rates apply only to newly-opened CDs that advertise the new rates.

Your existing CD rate will not change because you’ve agreed to a locked rate and maturity term when you originally opened the CD. Unfortunately, you’ll feel that you’re not earning as much interest as you should.

The exception is if you have a bump-up CD, a special type of CD that may allow you to change the CD rate without incurring a penalty.

What you should do: Don’t feel like you’re missing out.

Consider creating a CD ladder, which allows you to take advantage of the best of CD rates regardless of the direction of the federal funds rate.

Bad for Borrowers

The negative effect of the Federal Reserve announcement is that borrowing rates increase too.

Effectively, you’re going to pay more interest charges on your credit lines.

Credit cards

The APRs on your credit cards are likely to go up.

If you carry a balance on your credit card account from month to month, expect to fork over more in interest payments.

Those who are struggling to pay off a large amount of high-interest credit card debt will find it even more difficult to escape from this financial hole.

People who pay off their balance every month will experience no effect of the rate change. No balance means no interest charges.

What you should do: Ask your credit card issuer for an APR reduction. The worse they can say is “no.”

Call the number on the back on your credit cards. Your chances of success are higher if you’ve been on-time with your payments.

Student loans

Depending on the type of student loans that you have, the interest rate may or may not change.

Many student loans have fixed interest rates, which means that the interest rate is unaffected.

Variable-rate student loans, however, will experience an increase in interest rates.

Most loans (excluding Perkins Loans) first disbursed prior to July 1, 2006, have variable interest rates that are effective from July 1 of one year through June 30 of the following year.

What you should do: Prepare yourself for a higher monthly payment.

Consider deferment or forbearance if this possible a financial issue. 

Mortgages

A mortgage loan may or may not suffer a rate increase depending on the type of mortgage that you have.

With a fixed-rate mortgage, your interest rate does not change because that rate that you signed up for during the mortgage application is the rate that applies for the life of the loan.

With a mortgage with terms that include variable rates, you will end up paying more interest as a result of the rate hike.

If you're applying for a mortgage, your bank may have offered a rate lock that expires within a certain period of time. It means that the rate is the one that you get, under the condition that you qualify for the mortgage before the expiration.

What you should do: Consider refinancing your mortgage for a chance at a lower rate.

Prospective mortgage applicants should move fast to lock in a mortgage if a rate lock is in effect.

Other installment loans

With other types of installment loans, such as personal loans and auto loans, the effects of the rate hike are similar to that of mortgages.

Because most personal loans and auto loans have fixed rates, your interest charges are not likely to increase -- a good thing.

However, for people who do have variable-rate options of these loans, monthly payments are going to be higher.

What you should do: Consider refinancing these loans for a lower interest rate -- best done if your credit has improved since getting the loans.

Conclusion

The Fed’s rate increase announcement serves as a double-edged swords.

Savers gain and borrowers lose.

By understanding how it affects you, you can do your best to plan around it and ensure that your finances are still making progress.

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