Rate increase affects personal finances

The Courier-Journal

Yesterday's increase in interest rates can affect your finances in many ways. Here are some things to know:

Q: What happened?

A: The Federal Reserve, which controls the nation's money supply, raised its federal funds interest rate by a quarter percentage point to 1.25 percent.

Q: What's that?

A: The federal funds rate is the overnight interest rate that banks charge other banks that need money to meet reserve requirements. The funds rate has a "trickle-down" effect on other short-term rates, including the prime rate, which is what banks typically charge their most creditworthy customers. The prime, in turn, often is used as a benchmark to determine the interest rate charged on a variety of consumer borrowing, such as credit cards and home-equity loans.

Q: How will credit cards be affected?

A: The rate on variable-rate cards could rise pretty much in step with the federal funds increase, said Greg McBride, senior financial analyst for Bankrate.com, a Florida firm that tracks financial information.

And you'll still get deluged with pre-screened mail solicitations, he said, but "those great rates might be tougher to get."

Q: What about auto and home-equity loans?

A: Auto-loan rates already have been moving higher, and will continue to do so, McBride said. Existing fixed-rate home-equity loans won't be affected, but rates will be higher for new borrowers. Rates also will move higher on new and existing variable-rate home-equity lines of credit, which often move in step with the prime.

Q: Mortgages?

A: Here, fixed rates move well ahead of Fed moves and are tied more to long-term government bonds. As such, rates started moving higher a couple of months ago, McBride said, and reflect yesterday's increase as well as an additional quarter point increase that might come in August. Adjustable-rate mortgages, though, are more likely to move with short-term rates.

Q: When will I notice any changes?

A: Some variable-rate increases could show up in July statements, while others could take several months, based on billing cycles.

Q: I'm a saver, not a borrower. Is this good news?

A: It is for certificate of deposit lovers, McBride said. "CD rates started to move higher in anticipation of higher rates and will continue to do so," he said. Shorter-term CDs tend to move in line with short-term Treasury securities.

Q: How much will this cost me?

A: According to McBride, for every $10,000 in credit-card debt, a quarter-point rate increase will boost your payments a little over $2 a month. On a $25,000, five-year auto loan, the monthly increase could be $3.

With CDs, according to the financial calculator on www.bankrate.com, every quarter-point rate increase on a one-year, $1,000 CD translates into about $2.55 more in interest.

Q: What should I do?

A: If you're a borrower, lock in fixed rates and eliminate or minimize your exposure to variable-rate borrowing, McBride said.

If you're looking for a mortgage and know you'll be moving in a few years, consider a hybrid mortgage, which McBride said currently has a fixed rate of about 4.9 percent for five to seven years, before the adjustable phase kicks in.

Savers, he said, should limit maturities to a year or less, to preserve their flexibility. "Refrain from tying up maturities longer than one year while yields are so low."

And because bond values decline when interest rates rise, he said, reduce maturities there as well. "The shorter the better."









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