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 "It's like the first snowfall," said Greg McBride, chief financial
analyst for Bankrate.com. "The first snowfall is not what closes
roads and cancels school. But it's a sign the seasons are changing."
The U.S. Federal Reserve Bank typically changes the influential
federal funds rate in a series of moves over time rather than all at
once. The Fed's last sequence of 17 quarter-point rate increases
over two years ended in June 2006, while 10 subsequent cuts between
September 2007 and December 2008 left the rate near 0 percent.
Future increases may well be more gradual given the challenges the
economy faces, McBride said.
"This is going to be different than last time," McBride said. One
increase "doesn't mean the second will be on its heels."
Even if the Fed decides to leave rates unchanged this week, market
watchers expect a rate hike before the end of the year. Here is what
a boost in rates will mean for your finances.
SAVINGS ACCOUNTS
Most banks will be slower to pass higher rates on to savers than to
borrowers. Bank profits have been squeezed by low interest rates, so
many will hold off on raising yields for savings accounts and
certificates of deposit to gain "some breathing room," McBride said.
Right now, banks are giving savers a mere 0.47 percent on savings
and money market accounts, according to Bankrate.com. Look to online
banks, which already compete harder for deposits, for better rates.
Competition among these outlets already increased the rates they pay
savers by about a quarter percentage point on average over the last
two years, even as other rates stayed flat, McBride said.
CREDIT CARDS
Credit cards usually have variable rates, which means carrying debt
gradually will get more expensive. (The average
interest rate for variable cards right now is 15.72 percent,
according to Bankrate.com.)
Issuers may eventually cut back on 0 percent balance transfer offers
as well or trim how long the teaser rates last, said Bill Hardekopf,
chief executive officer of LowCards.com, a credit card comparison
site. Now may be a good time to nab one for 18 or 21 months and use
it to pay off your balances.
MORTGAGES
Mortgage rates are not tied directly to the federal funds rate and
how they will respond is hard to predict, said Dick Lepre, a senior
loan officer with San Francisco's RPM Mortgage who writes the weekly
RateWatch Newsletter. The interest rate for the typical 30-year
mortgage is 4.05 percent, while the popular 5/1 adjustable-rate
mortgage is averaging 3.24 percent, according to Bankrate.com.
Payments for adjustable-rate loans may tick up, since those reset
based on short-term rates, but that doesn't necessarily mean
switching to a fixed-rate loan is a slam dunk.
"Should you refinance? At this point, nobody knows," Lepre said.
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AUTO LOANS
One or even two interest rate boosts are unlikely to have any impact
on auto loans, thanks to strong car sales and eager lenders, said
Zhenwei Zhou, director of statistical analysis for car comparison
site Edmunds.com.
The interest rate for financing a car over a 60-month period is 4.28
percent, according to BankRate.com. And it's 5.15 percent to finance
a used car over 36 months.
"The cost of money is still so extremely low, plus the competition
is fierce," Zhou said.
STUDENT LOANS
Federal student loans have offered fixed rates since 2006, but many
private student loans have variable rates that will soon tick
upward. If you have good credit, consider consolidating private
student loans into a fixed-rate loan, said Mark Kantrowitz, senior
vice president and publisher of education resource site Edvisors.com.
The average interest rate for a fixed-rate private student loan may
be a few points higher than those for variable-rate debt, but
borrowers who have responsibly handled their loans since graduation
may qualify for lower rates thanks to improvements in their credit
scores, Kantrowitz said.
Citizens Bank and Wells Fargo offer private student loan
consolidation, as do start-ups such as Earnest, SoFi, CommonBond and
others.
STOCKS
The Fed's increase has been expected for so long that it is already
built in to current equity prices, said Judith Ward, a senior
financial planner and vice president of T. Rowe Price Investment
Services. Recent stock market volatility has more to do with
economic problems in China and other factors unrelated to U.S.
interest rates, she said.
Ward recommends against trying to predict the timing and pace of Fed
moves or making big shifts in your portfolio as a result. "As long
as you have an appropriate asset allocation and take a long-term
view, you'll be all right," Ward said.
BONDS
Interest-rate increases lower the value of existing bonds, which pay
lower rates. Over time, though, bond investors benefit from greater
interest payments. Investors concerned about their bond portfolios
should consider diversifying into emerging markets and high-yield or
junk bonds, which are typically on different cycles than U.S.
government and corporate bonds, Ward said.
(Editing by Lauren Young and Cynthia Osterman)
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