The Fed and you: What to expect with rising rates
Aside from the ups and downs (mostly down) of stocks and bonds, you won't see any significant change in your financial situation when the Federal Reserve finally raises interest rates. At least not right away.
But this first rate increase, expected to be announced Wednesday, likely is a harbinger of more to come. The Fed will probably move more slowly in its monetary tightening moves than it has in the past, when rapid rate increases helped burst the dot-com and real estate bubbles, said Greg McBride, chief analyst for Bankrate.
But a series of increases could push rates higher for borrowers and somewhat higher for savers. Here are some areas that will be affected:
Credit cards. Card issuers can, and will, quickly raise their rates. They don't have to wait 45 days to pass along a Fed rate increase as they would have to do if they were increasing rates on their own.
"Any credit card that has a variable rate where the base is tied to the prime rate will go up a corresponding amount," said Bill Hardekopf of LowCards.com. "So, we'll see rates go up on a great majority of credit cards."
Zero percent offers won't disappear, however, because issuers have found they're good for attracting new customers. At most, the teaser-rate periods -- which now extend as long as 21 months -- might get shorter, said Ben Woolsey, president of CreditCardForum.com.
Mortgages. Fed rate increases won't crash the housing market, said Erin Lantz, vice president of mortgages at real estate site Zillow. The improving economy that prompted the increase should be good for home sales. Also, rising rates may take awhile to filter through to mortgages
Borrowers with adjustable-rate loans have a window to lock in fixed rates that aren't much higher than what they're paying now. Refinancing to a five- or seven-year hybrid might raise their rate from just under 3 percent to around 3.25 percent, McBride said.
Five- to seven-year hybrids also are a good fit for homebuyers, providing they expect to move before the rate becomes adjusted. "Otherwise, go with the permanent payment affordability of a fixed-rate mortgage," he advised.
Auto loans. J.D. Power estimates that a 0.5 percentage point increase in auto loan rates could reduce demand by 150,000 vehicles over the course of a year. Industry experts, though, predict lenders will be slow to pass along rate increases -- particularly the automakers' captive financing arms, which finance most new car sales, said Eric Lyman, vice president of industry insights for TrueCar, an online car-shopping site.
Auto loan rates could spike if the economy heats up and leads to quicker rate boosts from the Fed, said Zhenwei Zhou, director of statistical analysis for rival car shopping site Edmunds.com. Conversely, loan rates also could rise if the economy tanks and default rates soar. But Zhou expects a middle path, with modest growth and relatively stable car loan rates.
"The Fed rate increase will be gradual, and there is still fierce competition of the auto market," Zhou said.
Savings accounts. The average rate on FDIC-insured savings accounts has risen about a quarter-percentage point in the past two years, and banks aren't likely to boost them much more in the near future. Low rates have squeezed banks' profit margins, and they want to build in some "breathing room," McBride said. The place to look for better savings account rates is with online banks, where competition has already pushed rates over 1 percent and may goad them higher.