How is the increase in interest rate going to affect you?

On 19th December 2018, the federal funds rate was increased by the Federal Reserve, from 2.25 percent to 2.5 percent.

It may be noted that the central bank reduces or raises the interest rate to manage inflation. Higher rates make it more difficult for banks and financial institutions to borrow from each other, resulting in lost financial opportunities for banks. Such loss is passed on by the banks to consumers.

How is the interest rate hike going to positively affect you?

Increase in the interest rate can have a positive effect on specific investment accounts and savings. Banks which may receive increased profits from higher interest on loans may pass on some part of those profits on savings financial products that customers have with them. Thus, there is a possibility of a higher interest rate for varied products like savings accounts, Certificates of Deposits, or other types of investments. Such transfer of profits is however not guaranteed.

Since 2015, the federal funds rate has been hiked by the US Federal Reserve eight times. The interest rates of savings account during this period have however remained stagnant. So, if the interest rate offered by your bank for your savings account does not increase in the coming few months, then look around at other banks and check if they are offering better interest rates. If you find a better deal, change over to that bank. It may be noted that some of the highest interest rates are offered by online savings bank accounts.

A car loan, mortgage, or any other kind of long-term loan with a fixed interest rate will not see any increase in the interest rate. But the interest rate on a new loan will be higher.

How is the interest rate hike going to negatively affect you?

The increase in interest rates will result in higher interest on credit accounts, loans, and investment accounts. Thus, consumers will have to pay higher interest on credit card debt.

It may be noted that increases in the interest rate gets filtered down to consumers over a period of a few months. Thus, borrowers with home equity line of credit or credit card debt can pay whatever they can towards such debt or pay it off fully. So, when the rate increase eventually hits the debt accounts in some months, the sting of the interest hike will be significantly reduced.

People with excessive levels of credit card debt can opt for consolidation of such debt on to another credit card that currently has a lower rate of interest. There is also the option of applying for a new credit card with a reduced interest rate as compared to your current credit card. You may pay off the credit card with the highest rate of interest or you can pass that debt to another card. A good option is to apply for a credit card that comes with no interest for a specific time frame on balance transfers. Then, transfer all current credit card debt onto that card if possible.