How the Federal Reserve's Interest Rate Increase Could Impact You

Last Wednesday, the Federal Reserve raised its benchmark interest rate by 0.25%. Since 2006, this is the second time rates have gone up. The last time was also for +0.25% in December 2015. In addition to Wednesday's announcement, in 2017, the Fed is expected to increase its rates potentially another two or three times. 

Here's a few areas where millennials may be impacted--for better or worse--due to the increases in interest rates:

Credit Cards
Most credit cards have a variable rate which is usually pegged to an index. The index is usually directly impacted by changes in the Federal Reserve's benchmark rate. This means, if you have $5,000 in credit card debt, you'll be paying an extra $125/year in interest. (This is on top of the 17%-25% interest you currently are paying!) If interest rates go up further in 2017, this adds up and further increases your debt burden.

Got credit card debt? If you haven't already done so, make a plan to aggressively pay down your credit card debt, starting with the highest interest rate cards first. 

Mortgages
In the past several years, mortgage loans have been relatively cheap. (That's one of the reasons why your mortgage lender has probably been trying to get you to refinance!) If you're already shopping for a home currently, near-term mortgage rates likely won't move lock step with the rate increase, since this rate increase had been expected for quite some time. Typically, unexpected changes in rates are what will result in more volatility to mortgage rates. But, if you're in the market for a home next year, you could expect to see some change from current rates. Over the past two years, 30-year mortgage rates have averaged roughly 3.5%-4.0%. If the 2017 rate increases do occur, it wouldn't be surprising to see mortgage rates above 4%. 

Planning to purchase a home in 2017? When you run the numbers in a "mortgage calculator" on how much your mortgage could be, start using 4.25% as the assumed interest rate to be conservative. 

Savings
If you have any money in checking or savings accounts currently, you'll know that you're pretty much making "nickels and dimes". The average interest rate on savings accounts is currently 0.11%. That means, if you had $10,000 in savings, you're making $11 per year, or less than $1 per month. With the Fed's latest move, you might begin to make some "quarters" -- better than before, but probably not that meaningful. 

Want to keep your money liquid, but earn a little more than 0.11%? Sign up for a high interest savings account such as Ally or Synchrony, which can pay you around 1%. That's almost 10x more than what you're getting now. More options here. How are these banks able to pay a higher rate? Well, for one, they don't have brick and mortar stores to maintain and staff; everything is online.