Consumers can expect changes in everything from car loans to credit cards.
WASHINGTON — Finally, interest rates are going up.
After nine years of some of the lowest interest rates in history, the Federal Reserve on Wednesday started the process of making it more expensive to borrow money and more lucrative to save.
Consumers can expect changes in everything from car loans to credit cards. But analysts are anticipating such a mild difference for the next year that people may wonder why talk of a rate increase was such a big deal.
While the Federal Reserve raised an interest rate it controls (the Federal Funds rate) 0.25 percent, that rate merely influences — but doesn’t control — the rates you get on your savings or the interest you pay on many types of loans.
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Banks and other lenders make their own decisions. Depending on the type of lending they handle, they will mimic the Fed, or be influenced by the Fed. Some will respond immediately; others will be driven more by how well the economy is doing, whether inflation looks like it’s picking up, and the competitive pressures lenders are facing when they try to attract your business.
While a 0.25 percent increase is tiny, some analysts think the Fed might raise rates two or three times next year — 0.25 percent each time, to 0.75 percent or 1 percent. After 1 percent, you are more likely to feel the impact than from Wednesday’s minimal 0.25 percent.
Rates will likely increase slowly, so you won’t see a huge burst in interest on many types of loans. But the impact depends on what you need to borrow. Here’s what to expect:
Q: Will your interest rate go up on your credit card?
A: Probably quite soon. Although some cards have interest rates that are fixed and won’t change, many can adjust daily. “Expect a change” higher, said Robert Baird bank analyst Bryce Rowe.
So, as the Fed increases rates 0.25 percent, your interest rate — unless fixed at a specific rate — is likely to go up by that amount. And if the Fed raises interest rates three times more in 2016 — 0.25 percent each time — you could be looking at an interest rate about 1 percentage point above where it was the last time you looked.
The average credit card is currently carrying a 15.7 percent interest rate, according to Greg McBride, analyst for bankrate.com. The current rate increase by the Fed will probably mean that average rate goes to about 16 percent soon, and if there are four rate increases the average rate could be about 17 percent, said McBride.
Q: Did you blow it waiting to buy a house?
A: Not if the economy continues to behave as the majority of economists expect and if Federal Reserve Chair Janet Yellen keeps sending the message she’s in no rush to raise rates and plans a gentle path of increases, said Randall Kroszner, former Federal Reserve governor and current University of Chicago Booth School of Business.
Interest rates on mortgages are not determined directly by the Federal Reserve but are influenced by expectations about the economy and the future of interest rates. Currently, the economy is growing modestly, Kroszner said.
If you want to see where mortgages are going, keep an eye on U.S. Treasury bond yields. When those yields are going up, it means optimism about the economy or expectations of rising inflation. Mortgages will follow the same path. But U.S. Treasury rates, and mortgage rates, could go down if investors start worrying that the U.S. economy is slowing. Some analysts such as Doubleline bond fund manager Jeffrey Gundlach are concerned rate increases by the Fed could slow the economy.
With continued moderate economic growth, economist Lawrence Yun, of the National Association of Realtors, said a 30-year mortgage may go to 4.5 percent, “and at the most 5 percent by the end of next year.” At the end of last week, Freddie Mac’s survey of mortgage lenders showed the average rate on a 30-year mortgage at 3.95 percent. On a $200,000 mortgage, a rise in rates to 4.5 percent could mean monthly payments of $1,013 versus $954 at 4 percent.
Q: Is your adjustable-rate mortgage going to sting?
A: Yes. “Be wary,” said McBride. Often adjustable-rate mortgages can be reset at a higher rate once a year, and because it’s once for a full year, the increases “come in spurts, not drips and drabs.” In other words, multiple Fed interest-rate increases next year could be blended into one big increase on your mortgage. This is different from credit cards, which will raise interest rates just a little each time the Fed acts.
Q: Have you been having trouble getting a mortgage?
A: Since many analysts see the Fed’s decision to raise rates as a vote of confidence in the economy, that can be good for people who want to borrow money. If lenders were reluctant to lend in the past because they wondered if they’d get repaid, “they may ease up a little now” and grant loans they wouldn’t in the past, said Rowe. The assumption will be if conditions are better — if people are getting jobs and raises — there’s less risk lending people money. FICO scores, which now have to be almost perfect to qualify for loans, could become acceptable if a little less perfect.
Q: Do you borrow on your home?
A: Home-equity loans typically are pegged to the prime rate, which will climb along with the Fed’s changes in rates, said McBride. He predicts you will see your interest rate climb within one to two billing cycles.
Q: Do you intend to buy a car?
A: There is a lot of competition between lenders to grant car loans, so interest rates are low (below 3 percent on many now) and will probably increase little, said Rowe. Lenders feel more confident granting car loans than mortgages because they can easily confiscate your car if you miss a payment. Therefore, they don’t think they need to charge extra interest to cover them for losses. A 0.25 percent increase in car loans “is inconsequential,” notes McBride — only about $3 more a month if you buy a $25,000 car. That’s $452 a month on a five-year loan versus $449. If the rate goes to 4 percent, the monthly payments would be about $460.
Q: Are you going to college?
Federal student loans are set for the 2015-2016 school year, so you can count on Stafford loans to have a 4.29 percent interest rate and graduate loans 6.84 percent. But beware of private student loans, which typically have variable rates. They will keep getting more expensive as interest rates climb.
Q: Will you finally make money on CDs or savings accounts?
A: Maybe a tiny amount, but not much. Individuals with savings may “feel a little extra change” but not a full 0.25 percent, Kroszner said.
“Banks are flush with deposits,” or the money people put into savings accounts and CDs, Rowe said. So the institutions don’t need to pay you more interest to entice you and others to save more. Commercial bank deposits total roughly $10.6 trillion, more than double what they were in 2004.
Eventually banks could feel some pressure to hold onto your savings if U.S. Treasury bonds start paying significantly more than they do now. After all, people could choose to invest in Treasury bonds, not bank CDs, if the bonds boost interest rates a lot. But analysts aren’t expecting that. Treasury bond rates are not controlled by the Fed, but yields on them go up when economic data and hints from the Fed suggest the economy is improving or inflation is rising.
If U.S. Treasurys do as analysts are expecting, they will climb to only about 2.50 percent to 2.75 percent next year from 2.28 percent Wednesday, said Charles Schwab fixed-income analyst Kathy Jones.
That isn’t expected to pressure banks much to raise interest on your savings. With 10-year Treasurys at 2.28 percent, five-year CDs at some banks were paying as much as 2.25 percent. See www.bankrate.com.