Update: Federal Reserve has increased rates again. Reposting this so people understand the possible changes. This is the second rate hike of 2017 already.
In case you didn’t know, the Federal Reserve has increased the federal funds rate by 25 bps or 0.25%. This is the second rate increase in ten years (last being in December of last year). I’m not going to analyze this too much, but I thought it would be helpful to look at two ways this might affect you. Keep in mind they are expecting a further three rate hikes in 2017 (futures markets are predicting only two though).
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Credit Cards
I hope all readers are paying their balances in full, if you aren’t then you’re being very naughty and need to start doing that to make sure you aren’t paying excessive interest rates that most credit cards come with (yes yes, it’s fine if you’re taking advantage of a 0% APR introductory rate and know what you’re doing).
If for some reason you do have credit card debt, then chances are the interest rate on that card is variable and changes based on the prime rate. For example on the Chase Sapphire Reserve they have the interest rate listed as:
16.24% to 23.24%, based on your creditworthiness. These APRs will vary with the market based on the Prime Rate.
If you look into the fine print further it’ll say:
We add 12.74% to 19.74% to the Prime Rate to determine the Purchase/Balance Transfer APR. Maximum APR 29.99%.
This means that the APR on your credit cards are all likely to increase by 0.25% as that prime rate is also increasing. In simpler terms if you have $100 in credit card, you’ll be paying an additional ~$0.25 per year.
Again, please pay your credit cards in full! There is no point chasing rewards if you’re not able to manage your credit effectively – you’ll quickly destroy any profit you do earn from credit cards with excessive interest rates. Only make purchases you can afford to pay for in full (and if you manufacture spend, make sure you have a healthy float in case something goes wrong).
Bank Accounts
If you’d read the above, you’d be hopeful that the interest rates on deposit accounts would also increase by 0.25%! Unfortunately that isn’t the case as these accounts don’t have their interest rate tied to that prime rate. It’s up to individual financial institutions if they want to increase these rates or not. I’d probably expect some to increase their savings rates, but you’re still probably going to get a much better interest rate with a rewards checking account (offering up to 5% APY currently).
Discuss.
