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).
Contents
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.
I think another talking point is currency rates. The British pound dropped today with the fed rate increase. Nothing significant but just reinforces that it could be a good time to visit certain countries to get a little more bang for your buck.
I am amused by his use of the word “discuss”. Reminds me of one of Mike Meyers characters, and makes me smile.
I mean seriously who cares Will??
I dont think Carol handled it that bad.
You guys have made me $1000s and im sure others and we complain about a word “discuss”.
Some things annoy some people and not everybody, I have no issue with constructive criticism at all and I’d rather people speak up if there is something about the site they don’t like. I don’t think the person did it in a mean way 🙂
I think this might be a good time to recognize a potentially significant shift in the economic climate of our national economy. As Will mentioned, the Fed has only raised interest rates once in the last 10 years, which is highly atypical of normal credit conditions. This atypical behavior has been demonstrated by central banks across all developed economies. Interest rates have been abnormally low for a decade. This isn’t normal. For the first time in human history, 10-15 trillion dollars of debit actually sells with a negative yield in the world right now in Europe and Japan. This definitely isn’t normal. The last times this sort of thing happened we got dot com and housing bubbles, and of course their subsequent pops. US unemployment is at near historic lows right now. This will change some day. The change might be benign, it might be catastrophic, it will probably be something in between, but it will happen. Stock, bond and home prices are at all time highs. This will change some day. It might be benign, it might be dramatic, it will probably be something in between, but it will happen. I think it is a good idea to look at the second .25% rate hike like a fire drill- a sort of silly, insignificant feeling event in itself, but a good chance to look ahead and plan for the future, and how you hope to react when things might be more difficult. Just take a look at your personal financial situation and make a plan. Talk about it with your family. Don’t scare yourself or anyone else, or go buy guns and a bunker, but just prepare yourselves in a meaningful, realistic way for the day when some sort of storm again comes, because some day, it probably will, in some way or another. Make sure that you have your debt under control, especially credit card debt, if you have any, as Will advised. Make sure that you have a sufficient LIQUID, CASH emergency savings fund to last you and your family for at least 2-6 months of essential living expenses, in case you and/or your partner lost your job(s). In my opinion, if the value of this reserve is subject to any market price fluctuation, it is not liquid enough. This should be 100% at your immediate disposal in case of emergency. I.e. some sort of checking or savings account, not a stock or bond fund. It’s true that you won’t earn anything on this money right now- 1% in savings account- but the job of this money is not to earn a return, it’s to save your family’s finances in case of emergency. Have a back up plan of what you might like to pursue if you got laid off unexpectedly. Always keep your resume and job network outside of your current workplace up to date and be mindful of maintaining your job skills and personal marketability. Remember what life was like when the world was falling… Read more »
Maybe a good time to fly to Japan now
It is petty, you were right. I doubt others are annoyed by it or even notice it frankly. It’s a personal peeve. Some things are better left unsaid even if you personally feel that way. Choose wisely.
This may just be a pet peeve of mine, but please do not end posts with “discuss.” Obviously, readers will ‘discuss’ in the comments of any post if they feel there is any reason or relevance to do so. Sorry if this comes across as petty or an attack, I’ve just seen this done repeatedly on other sites and don’t wish it to become a trend here.
Seriously? They spend so much of their time and energy to give us free info to help us make tons of cash, and you’re b*tching about “discuss?” How about saying “thank you”?
Thank you.
Discuss.
Hi Carol, I appreciate the sentiment but you could have probably gotten your point across in a more friendly manner. I really want the comments section to be a place people are happy to visit rather than it filled with hate :).
Agreed, it’s very tacky.
Hi Peter,
Thanks for the constructive criticism. I have a question, is your issue in this case just us saying ‘Discuss.’ or with any prompt to get people to participate in the comments. We usually have some sort of call to action to get people to comment at the end of posts (because it leads to increased comment rates and I also think it makes the site more useful), in this case I was just being lazy.
I can definitely avoid being lazy and just writing discuss in the future, but there is an upside to encouraging people to comment – so I hope you will bare with us in the future!
My issue in this case is just saying ‘Discuss.’ I do not have any issue with the general concept of a call to action at the end of a post. Overall, the call to actions on the site are very appropriate, oftentimes asking readers to provide additional information relating to the post (such as “If you open the account, please comment letting us know if it’s a hard pull or allows credit card funding.”).
I absolutely did not intend for my post to imply that I do not appreciate the content of the posts and the work that goes into this website; it is an invaluable resource.
Don’t worry, I didn’t take it that way. We always welcome constructive feedback so thanks for leaving it, in the future I’ll make sure I put a bit more thought rather than just saying discuss 😀
Just out of curiosity, are credit card companies allowed to increase it more than 0.25%? Basically, I’m wondering if I can use this to determine which banks are the biggest d-bags…i.e. the Fed raises it 0.25% but CEO of XXX decides this would be a great time to raise it by 0.5-1%.
I think the answer is no (at least not without fair warning). The prime rate isn’t a number they can make up as they go, it’s the same for everyone.
That’s not exactly true. The Fed rate is the same for everyone (0.5% presently) but prime rates vary slightly. They are just the best rate a bank will offer to consumers.
We aren’t a socialist nation so the answer is Yes, they can do whatever they want within certain laws. Variable APR can have its own terms. Banks can charge and pay whatever they want within laws, but remember they are also competing for business. It shouldn’t matter in the end as those buying things they can’t afford pay interest and transfer the wealth to the banks. Lesson? Don’t buy things you can’t afford, this is why the middle class is disappearing; everyone tries to be middle class but instead of acquiring assets, they acquire liabilities with negative value. With the first 1-2 rate hikes, bank typically hike interest rates quite a bit to cut down on Interest Rate Risk so they aren’t trapped at low rates.
…”In simpler terms if you have $100 in credit card, you’ll be paying an additional ~$2.5 per year.” Shouldn’t it be $0.25?
yup