Jun 20, 2018

Federal Reserve Rate Increase: Impact on Credit

The Federal Reserve has officially raised interest rates by a quarter of a percentage point. While this may not sound like a major change, it’s the highest level in the past decade.

According to Forbes, consistently low interest rates over the past decade have allowed businesses to finance projects with incredibly cheap capital. But with this strategy came other results, like slower economic growth.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent,” Fed officials said in an official statement. “The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

So how will this affect you? Those with home equity lines of credit, adjustable-rate mortgages, and credit card debt will start to notice increases in their monthly payments. Basically, if the loan has variable rates, you can expect some variability. And it probably won’t be varying in the direction you’d prefer.

This is notable because credit card rates currently sit at record highs around 17%. And because most cards come with a variable rate, they’re directly tied to the benchmark rate announced by the Fed. With the average American carrying a credit card balance of more than $6,000, this will definitely cause discomfort for lots of people. After all, the nation’s total credit card debt is sitting at record highs of more than $1 trillion.

On the other hand, bank customers will begin to notice their savings rates trending higher in a positive fashion. For those with savings accounts or CDs, this is definitely great news. “While rising interest costs constrain borrowers … savers are finally getting their day in the sun,” explained Greg McBride, chief economist for Bankrate.

As for the broader loan landscape, there will be a fair bit of stability. For example, you might feel a little bit of a sting if you take out a car loan, but the rate increase is unlikely to make much of an impact on a 30-year home mortgage or similar long-term loan.

Additionally, rising rates may also bring more opportunities to borrowers. The low rates we’ve seen on loans in the past decade have yielded smaller profit margins for banks. These rate increases will give them some breathing room and potentially encourage them to become more willing to work with borrowers who would’ve been rejected in the past.

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About the author

Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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