The biggest news this month is that interest rates are increasing for the first time in nine years. You heard right, nine.
Here’s what happened
Over the past 9 years, the interest rate has been held at pretty much zero to promote economic recovery in the wake of the recession. On Wednesday, December 16, the Fed declared that it is finally raising its key interest rate by 0.25%—marking the first of what’s predicted to be a serious of gradual increases.
What it means for you
The interest rate being zero meant that the cost of borrowing money was also effectively zero. The interest rate rising is a sign of economic recovery, but has a lot of implications for Americans across the country.
- Things are about to get more expensive—buying a car (if you’re taking out an auto loan), house (if you’re taking out a home loan), private student loans, and your credit card debt. However, these changes will not be immediate, so you don’t have to act right now. It’s a good thing to keep in mind though as you plan out big purchases for the year, though.
- If you’re a good saver, you’re finally about to be rewarded. Over the past 9 years, there has been effectively no return from parking your money in a savings account, with the very low interest rates offered by banks. As banks charge more in interest to borrowers (as the big banks have already begun to do!), they will eventually pass some of those savings to savers (not yet, but stay tuned!)
- This may also affect your investments (stocks, bonds, and even what’s in your 401k). It’s predicted that this may trigger volatility in the stock market. When the interest rates were essentially zero, more people put money in the stock market, because that was the only place they could see a measurable return (since returns on savings were practically negligible). Now, that’s about to change.
- If you’re planning on traveling, you may get more bang for your buck. The dollar is expected to get stronger, which is great for that vacation to the south of Spain you may have planned. Unfortunately, not so great for large American companies like Apple or Nike, which sell their products abroad.
What can you do about it
- Don’t fret. Though rates are set to increase, the increase will be gradual. Experts estimate that there will be relatively little impact on consumers for 2016. So breathe. You have time to figure it all out.
- That being said… if you’re looking to refinance, now might be a good time—a typical 30 year fixed rate mortgage is 3.9% right now, but historically, they’ve been twice as high. It might be a good idea to lock into a lower fixed rate now.
- Start trying to pay off high interest rate debt (always a good idea) or transfer your balances to a 0% credit card. On the saving side of things, you could start shopping around for higher rates on interest-bearing accounts to try to reap the rewards of being a good saver.
Interested in reading more about the interest rate hike?
Check out these articles for more information
Questions? Let me know in the comments or tweet at @getgreenshield.