5 Tips: How the Fed rate hike will affect you June 30, 2004: 5:07 PM EDT
By Gerri Willis, CNN/Money contributing columnist
NEW YORK (CNN/Money) -
It had to happen sometime. It's been four years since the Federal Reserve raised interest rates, but experts agreed that a hike was in the offing today.
Expectations were for a quarter point rise in the federal funds rate, the rate the Fed charges banks, and that's just what they did. But more hikes are likely in the offing. And that will make it more expensive for consumers to borrow money.
So what do you need to know? Here are today's five tips.
1. Credit card fans beware.
For consumers drunk on low cost credit, it's time to sober up.
While a quarter point rate hike is expected to initially raise credit card interest rates by just 19 basis points, subsequent rate hikes could bring rates nearly a full percentage point higher within nine months, says Robert McKinley of CardWeb.com.
In the short run, the costs aren't that dramatic -- for an individual with $10,000 in credit card debt, a quarter point rate hike tomorrow would result in an additional $25 a year in interest. But a year from now, that $25 could easily become $100 or more if debt keeps piling up.
What's more, penalty APRs -- the rate of interest to which credit card operators bump delinquent accounts -- will jump. If the Fed pushes rates 3 percentage points higher over the next year, then penalty APRs could go to above 30 percent, according to CardWeb.com. This is not the time to miss a payment.
Now that the Fed has raised interest rates by a quarter of a point, CNNfn's Gerri Willis tells you what the rate hike means for consumers.
The bottom line is that consumers who rode the low-rate wave to home ownership while living on credit may find they can't afford rising monthly bills.
One move that could help: Call your credit card issuer and ask for a lower rate. Read the offers you get in the mail and ask your issuer to meet or beat the best rate. You might be surprised by the results.
2. Kiss record-low mortgage rates goodbye.
Plain vanilla 30-year mortgage rates have been inching higher over the past few weeks in anticipation of a rate hike by the Federal Reserve.
Rates on a 30-year mortgage averaged 6.25 percent in the week ending June 24, compared to their low of 5.21 percent on June 12, 2003. Rates on the 15-year mortgage have followed the same path, now at 5.64 percent in the most recent week from a low of 4.6 percent last June.
If you're in the market for a home and are worrying that you may be priced out of that center hall colonial you're dreaming of, you may be better off moving sooner than later.
Holden Lewis of BankRate.com says rates will likely remain below 7 percent through the end of the year. Adjustable mortgage rates are still relatively low, but they're also on the rise. The latest data from Freddie Mac shows one-year adjustable rate mortgages (ARMs) averaged 4.13 percent last week, versus 3.45 percent one year ago.
If you already have an ARM, Keith Gumbinger of HSH Associates says it's time to sit down and reacquaint yourself with the terms of your loan. Make sure to check for maximum allowable rate caps when your rate adjusts. Hybrid ARMs in which the first rate adjustment can occur five or seven years into the term of the loan can have rate caps of as much as 5 percent.
"Welcome to the cold reality," says Gumbinger. "A lot of people selected short-term interest rate product and are now beginning to see how these things benefit the lender."
3. Think twice before using your home as a piggybank.
Home equity loans are lump sums borrowed at a fixed rate and paid off over a set number of years, so if you already have one, a rate hike won't affect you.
However, if you're shopping for one, expect to pay more. Lenders have already begun pricing in the rate hike. In April, the rate on a $30,000 HEL was 6.75 percent but if you signed on for one now, your rate would be 7.05 percent.
The same trend applies to home equity lines of credit (HELOCs). Most HELOCs are open-ended loans backed by the portion of the home's value that the borrower owns. They have adjustable rates tied to the prime rate. If you have a HELOC already, Gumbinger says you'll see your rate reflect that change in just one to three billing cycles.
Keep in mind that home equity lines of credit generally have no annual limits or per adjustment limits (other than a lifetime maximum of 18 percent).
If you're in the market trying to decide between the two products, keep in mind that while rates on consumer products tend to dwindle down, they often rocket up. Gumbinger points out that the prime rate (that's the rate many consumers rates are based on), jumped three percentage points between March 1994 and February 1995, from 6 percent to 9 percent.
Even so, he suggests you choose between a HELOC or home equity loan based on how you plan to use the money. If you have a one time credit need, you're better off with a home equity loan, while consumers who have ongoing credit needs, like ongoing medical bills or tuition bills will be better off with the line of credit.
4. Consolidate your student debt.
Most consumer rates are floating higher, but federally-guaranteed student loans are still going down.
Beginning July 1, federal student loan rates for 2004-2005 will fall to their lowest level in their 39-year history. Interest rates on Stafford loans, which are the bread and butter of student loans, will drop to 3.37 percent from 3.42 percent in 2003-2004.
That's good news for people in school now, but there is even better news if you've recently graduated and you've yet to consolidate your loans. For this year's grads who consolidate their loans in the first six months after grabbing their sheepskin, a low rate of 2.875 percent will be available.
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If you're just getting out of school, you may be considering buying a car to drive to your new job. If you're in that boat, you'll find auto loan rates are already on the rise. Just last week, the rate on a 36-month new car loan was under 5.59 percent, now the rate on the same loan is 5.62 percent, according to BankRate.com.
Longer-term auto loans rates are also up. Last week, the rate on a 60-month loan was 5.81 percent, now the rate has ticked up to 5.84 percent.
However, Lucy Lazarony of BankRate.com says dealer financing is still attractive. Sweet deals are still out there and they're not going to disappear for a while. But a good rule of thumb for consumers is to do some homework before heading to the dealership. Take a look at your credit report beforehand and know what you're eligible for. That way, you're less likely to be talked into a loan with a less attractive rate.
Lazarony also says having a loan in hand from a bank or credit union is always a good strategy. That way, the dealership has to beat your best deal. You can compare auto loan rates across the nation at www.bankrate.com.
5. Savers catch a break.
Higher rates mean better returns for CDs (certificates of deposit), money market accounts and savings accounts.
A CD is a time deposit with a fixed maturity date. CDs typically pay higher interest than a savings account but there's a penalty for withdrawing before the maturity date. The average rate on a one-year CD was 1.43 percent last week, now it's 1.48 percent.
Money market accounts allow investors to access the money they've deposited as it earns interest. The average yield for a money market account remained virtually flat in the last week at less than 1 percent.
Plain vanilla savings accounts return low rates as well. David Wyss says it might be a while before your savings account starts to earn any meaningful interest. He says it will be at least two years before savings accounts start yielding 4 percent.