Last month, the Federal Reserve raised the prime interest rate. This is the first time it has done so in nearly a decade, which means many of you have not experienced a rate hike in your adult lives. Even if you have, given the time between, you may want a reminder about what such an increase means.
First, if your payment amount goes up on any of your loans because of this interest rate hike, it is not because we chose to raise your bill. Adjustable rate loans are usually tied to the prime rate, so when the Fed raises rates, the bill for adjustable rate loans goes up regardless of which lender provided the loan. The government manages this process and uses it to control a variety of economic factors, including inflation and unemployment.
The fact that the prime interest rate has gone up is a good sign for the economy as a whole, although it might not be as good for your individual family.
For instance, as we just mentioned, if you have an adjustable rate loan, including many credit cards and student loans, your interest rate will go up. You will pay more in interest for each billing cycle, which will be reflected on your next statement. The rate hike is only a 0.25% increase, which amounts to one dollar in interest for every $400 in principal, so the effects should not be substantial on small loans. Larger loans, however, may have you feeling the pinch.
If you have a fixed-rate loan, your bill will not be affected. Many of our mortgages and home equity loans are fixed-rate loans, so if you have a high balance on your credit cards, student loans, adjustable-rate mortgage, or any other adjustable-rate loan, it may be time to turn that debt into a fixed-rate alternative in case the Fed raises the prime interest rate again.
On the positive side, the interest paid on your savings account, money market account and new share-savings certificates will go up. A higher prime rate makes savings products more valuable, so with the volatility in the stock market, you might prefer the relatively low-risk proposition our savings products offer.
If you have more questions about what is happening or how you can best protect your finances, please let us know. We have quite a few articles coming in the next few weeks to help guide you, but we can also help you find an investment and savings plan that is perfect for your family!