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What Does the Fed’s Rate Hike Really Mean for You?


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What Does the Fed’s Rate Hike Mean for You? Credit Cards, Auto Loans, Mortgage and Refinancing

When you hear the federal reserve is raising interest rates, it’s easy to panic without really understanding how it hurts you or even helps you so let’s break it down.

Let’s look at Jillian. She’s 24 years old, she has a steady job but she also has $5,000 in credit card balances then there’s the five thousand dollars she has left on her car loan. She wants to pay all that off and buy her first home so how will the fed’s rate hike affect Jillian’s bottom line? We asked debt.com chairman and CPA Howard Dvorkin.

Jillian will face higher interest rates on her credit cards. The average interest rate is hovering right now around 16% to 17%. If interest rates do increase, it could go up a point or more but nothing significant. Jillian will get a letter from her credit card company and by law they need to tell her 45 days before they hike the interest rates. That way it gives her time to either pay off the balance, which typically won’t happen or shop around for a better deal. As for Jillian’s car loan that’s not going to change at all. If you have a car loan or a personal loan or even a mortgage that has a fixed interest rate you’re locked into the interest rate when you sign up so they can’t change it. The issue here is do you refinance. The problem with refinancing is that you pay fees for doing it and that can often cost you more than you’ll actually save so Jillian will really need to do the math before she does anything but my sense is it’s often not worth all the hassle.

Finally, Jillian wants to buy a house. She’s thinking about rushing out to purchase a house now to beat the rate hike. That’s a terrible idea. First of all lenders, know that the right hike is coming so they’ve already baked in that hike into the current interest rate they’re charging. In other words, it’s too late to really save much. Second, even if you could save money, if you’re not financially ready to take on this big step you’ll actually suffer financially. Third, there is a theory that higher interest rates will drive down the price of the homes because it’s cooling off an overheated market. In that case, you might break even by waiting until you truly are ready.

As you can see from Howard’s comments, this is a complicated issue. Learn how to simplify it at debt.com. You can even speak with a trained financial counselor and receive free advice call us today.

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