Fed's move will help consumers earn more on savings
By Eileen Alt Powell
NEW YORK - The Federal Reserve's decision Wednesday to raise a key short-term interest rate means savers will earn more interest on their bank accounts and debtors will pay more interest on their credit cards and home-equity lines of credit.
But not a lot, at least in the short term.
"We're not talking about drastic action here," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis. "We're talking about small, incremental changes."
The Fed raised a key short-term interest rate by one-quarter of a percentage point - to 1.25 percent Wednesday, its first rate increase in four years - to keep inflation at bay as the economy picks up steam.
Savers are among the most eager for higher rates, since their accounts have been earning 1 percent or less in interest in recent years.
A quarter of a percentage point increase in interest translates to $2.50 per $1,000 in savings per year.
In addition, consumers who borrow money will have to pay more for the privilege.
Interest rates on car loans, which generally are tied to the prime lending
rate, have been going up since late March in anticipation of the Fed's move and are likely to rise further, said Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla.
"Consumers shouldn't let themselves be bullied into thinking they have to make a buy now because of rising rates" because they will not be moving up too far too fast, he said.
McBride said, for example, that a $25,000 auto loan financed for five years at 6 percent interest requires a $483.32 monthly payment.
If the rate goes to 6.25 percent, the monthly payment rises to $486.23, an additional $2.91 a month. At 7 percent, the monthly payment is $495.03, an additional $11.71 per month.
The place Americans will feel the rate increases most is on credit card debt, which currently totals some $750 billion, according to Fed data.
About half of the credit cards in the country have variable rates, which "will go up in tandem with the prime rate, which is driven by what the Fed does," said Robert McKinley, chief executive officer of CardWeb.com Inc. in Frederick, Md., which publishes data on credit and debit cards.
Cardholders could see the higher rates as early as July, he said.
In addition, fees for late payments and penalty rates for consumers who are above their limits or repeatedly late in paying also will go up, in some cases to 30 percent or more as the Fed raises rates, McKinley said.
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