How Rate Changes Could Affect Consumers

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The strong job market, low unemployment rate and rising wages are all good signs for the economy, but have posed a rising risk of inflation.  To offset this inflation risk, the Federal Reserve has gradually raised interest rates, which has the eventual effect of slowing the economy.

This continued rise in interest rates over the last two years has been both good and bad news for consumers.  If you are a saver it has been positive; if you’re a borrower it has been painful.  The increase in rates affects mortgages, credit cards, home equity loans and car payments to mention just a few, thereby affecting the disposable income of consumers.

Costs to Homeowners

Homeowners with fixed-rate mortgages are unaffected by a raise in rates but an increase in rates leads to rising interest payments on variable mortgages.  For example, a half percent rise in rates on a $100,000 mortgage translates into an additional $40/month.  Borrowers with adjustable rate mortgages that are set to change in the next year should consider refinancing immediately because it is possible to lock in a fixed rate lower than what the adjustable rate may increase to.

In fact, housing sentiment has just recently fallen to its lowest level in over a year according to a monthly survey by Fannie Mae.  Consumer attitudes towards buying a home have dropped to its second lowest reading in its history.  Fewer consumers now expect home prices to rise and fewer people now believe that mortgage rates will drop back to recent lows.  Mortgage application volume has fallen to its lowest level in four years as rates recently hit an eight-year high.

Credit Card Fees

Since most credit cards have a variable rate, as rates rise card holders will continue to pay higher fees.  According to Experian, the typical American has a credit card balance of $6,375, up 3 percent from 2017.  Total credit card debt has reached its highest amount ever, over $1 trillion, according to a separate report by the Federal Reserve.

Just a 0.25 point hike in interest rates will cost credit card users over $1.5 billion in extra finance charges.  One way to offset some of the rising cost of credit card debt is to search for credit cards that offer zero percent interest for a certain period of time.  Also, many credit card companies offer a “balance transfer” from a competing company which can also help offset a rise in rates in the near future.

Car Payments

An increase in rates also makes car loans more expensive.  As bank rates rise, car loans go up as well.  Consumers with higher-interest auto loans have been hurt over the last few years.  Higher rates have continued to drag on new vehicle sales with the average rate on a loan climbing one percentage point, according to Edmunds.

Helping Savers

Since deposit rates for savings accounts and CD’s rise and fall as the Fed Funds rate moves up and down, rising interest rates has helped savers. According to Bankrate, some savings accounts have risen to 2 percent, which has more than doubled since 2015.  In searching for higher savings rates, consumers may consider switching to an online bank as online banks are able to offer higher yielding accounts because they have fewer overhead expenses than traditional banks.

An increase in bank rates affects both consumer and business confidence.  Rising rates increase  the consumer debt level and leaves consumers with lower levels of disposable income.  They also make a company’s cost of debt more expensive.

Rising rates are typically not friendly to a healthy economy and/or the stock market. Consumers, corporations and investors are all impacted. Understanding how they are impacted helpa in managing financial risk.

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