The Federal Reserve bumped up its most important interest rateon Wednesday, its seventh rate hike since late 2015. The Fed's target federal funds rate is now between 2 and 2.25 percent, after the central bank kept it at zero or near zero in the years following the financial crisis.
MagnifyMoney analyzed Fed data to see how the rates consumers pay for loans and earn on deposits have changed since the central bank started raising them. In short, we find Fed rate changes have wide-ranging implications for consumers.
- Credit card borrowers are paying $110 billion in interest annually, up $31 billion from the annual $79 billion they paid prior to the first Fed rate hike in December 2015, making introductory 0 percent APR deals all the more attractive for some borrowers.
- Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2018, depositors earned $26.8 billion in interest on their savings accounts, up $16.8 billion from the $10 billion they earned in 2015.
- According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 1.92-point increase since December 2015. Credit card rates will continue to rise in line with the Fed's rate increases, and if the Fed raises them again, the average household that carries monthly credit card debt will pay more than $150 in extra interest per year compared with before the rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
- Rates on student and auto loans have also risen sharply, but only half as much as credit card rates, in part because the former are longer-term loans that rely less on the short-term federal funds rate. Federal student loan rates are set each May based on the 10-year Treasury note rate.
- Savers at big banks have seen little change, with the average savings and CD accounts passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks, which have aggressively raised rates. They now offer yields in the 2 percent range, versus just 1 percent in 2015. That's more than 20 times what typical bank accounts pay.
Here's a closer look at how the Fed rate hike affects different financial services:
Most credit cards have a rate directly based on the prime rate, for example, the prime rate plus 9.99 percent. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 1.92 points, roughly in line with the Fed's increase of 1.75 points.
That said, consumers can still find attractive introductory rate offers. For example, 0 percent balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0 percent.
Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like on late payments or balance transfers to keep their long 0 percent deals viable.
The Fed tends to raise interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25 percentage points, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.
The danger of such a small increase in the monthly payment is complacency. Remember that by paying the minimum due, you could be in debt for more than 20 years.
Rates are expected to keep rising, so it makes sense for consumers to lock in a low rate today. The best ways to do this are by leveraging long 0 percent balance transfer deals or by consolidating into fixed-rate personal loans.
On average, savings account yields haven't changed much since the Fed started raising rates. That's largely because major banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don't shop around to find higher rates at online banks and credit unions.
Consumers who rate-shop can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed's rate hikes work in your favor.
Back in 2015, it was rare to see savings accounts pay 1 percent interest. Today, many online banks are competing for deposits by offering savings account rates approaching 2 percent, flowing through about half of the Fed's rate hike into increased rates for depositors.
These savings account rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data: In the 12 months ending June 2018, depositors earned $26 billion in interest on their savings accounts, versus the $10 billion they earned in 2015.
Certificates of deposit
CD rates have moved faster than savings rates, up 0.19 percentage points for 12-month CDs since the Fed started raising rates. That's in part because they're more competitive, forcing consumers to rate shop when they expire at the end of their six-, 12-month or longer terms.
But that rate rise doesn't fully reflect what some smaller banks are passing through because the banks with the largest deposits have been slow to raise rates.
The rates on one- and two-year CDs at online banks have been increasing rapidly, and are now well over 2 percent, reflecting much of the Fed's rate increases since 2015. But the rates on five-year CDs have not been increasing as quickly. As a result, the rate curve has been flattening.
A reasonable strategy would be to invest in short-term (one- and two-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal. And if long-term rates start to rise, you can redeploy or build a ladder in a year.
Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on. Today, rates for new undergraduate Stafford loans stand at 5.05 percent, up from 4.30 percent before the federal funds target rate began to rise.
Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they're less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25 percent for undergraduates and 9.5 percent for graduate students.
For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate. But in general, a rising rate environment could mean less attractive refinancing options.
Personal loan rates tend to be influenced by many factors, including an individual lender's view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising-rate environment overall, we expect these rates will go up, making new loans more expensive. So consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on two-year personal loans tracked by the Federal Reserve have increased by 0.65 percentage points.
Prime consumers who shop for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.
But the overall rates across the credit spectrum have gone up since the Fed started raising rates, in part due to its hikes and because of recent greater-than-expected delinquencies in some parts of the auto lending market.
Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage rate has increased from approximately 3.9 percent to 4.6 percent as of Sept. 13. The mortgage market tends to follow trends in longer-term bond markets, like the 10-year Treasury, because mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate increases, and it's not unusual for mortgage rates to decline during some periods when the Fed is raising rates.
What consumers can do
Rates are only going to go up. That means life is going to get more expensive for debtors and more rewarding for savers.
If you're in debt, now's the time to lock in the lowest rate possible. Plenty of options are still available at this point in the credit cycle for people to lock in lower interest rates.
If you're a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.
Nick Clements is the co-founder of MagnifyMoney.com, which provides consumers with free info, tools and calculators.