Tips For Consumers As Rates Move Higher in 2016

Unless you pay for everything in cash and keep your life savings stashed in your mattress or in a fruit jar buried in the back yard, you’re probably aware that the Federal Reserve has started raising interest rates for the first time in a long time and will probably continue that course through 2016.

So does this mean you can no longer afford to buy that house, that car or that new washer and dryer, or anything else that you would normally pay for over time through a financing agreement tied to an interest rate?


Interest rates have a long way to go before consumers begin to significantly feel the impact from rate hikes. Let’s put things in perspective: rates have been held at a rock bottom, near-zero range for seven years. At its December meeting, the Fed raised the benchmark fed funds rate by a mere 0.25% to a range of 0.25%-0.50%.

Fed Chair Janet Yellen emphasized this point after the central bank announced liftoff. In response to a question about how the initial rate hike might impact consumers, the Fed chief said the impact would minimal, probably affecting little more than some adjustable credit card rates for the foreseeable future.

“We have very low rates and we have made a very small move,” Yellen said.

Indeed, consider that Freddie Mac reports the average interest rate on a 30-year fixed-rate mortgage currently stands at 3.97%, down from 6.5% in the summer of 2008 just as the financial crisis was hitting.

Nevertheless, the tide has turned and the era of historically low interest rates is almost certainly coming to a close. Consequently, there are a handful of things consumers can do to offset or at least lessen the eventual impact.

The first is to start shopping around for certificates of deposit (CDs) and savings accounts that offer the highest interest rates. For years rates on these popular savings tools have been all but nonexistent -- the national average savings account interest rate has hovered around 0.06% since 2013, according to the FDIC -- punishing savers, especially retirees living on fixed incomes.

With the Fed moving rates higher banks will eventually raise the rates they pay depositors, but some banks will move quicker and higher than others and that’s where consumers should be looking.

Anyone considering buying a home may want to consider speeding up the process if at all possible. The Fed’s likely incremental rate hikes over the next few years will take time to lift mortgage rates, but when mortgages do move higher it could prove costly for home buyers who drag their feet.

Consider that a homeowner who is approved for a $300,000 loan at the current average 30-year fixed rate of about 4% will pay about $1,400 a month. If rates move higher to 6% that monthly rate will soar to about $1,800 and the borrower will be on the hook for an additional $130,000 in interest payments over the life of the loan.

Homeowners currently holding adjustable rate mortgages and similarly adjustable home equity lines of credit should likewise start shopping around in search of fixed-rate alternatives – try to get in now while the getting is still good.

Most interest rates on credit cards are not fixed. So credit card holders who carry over debt from month to month could see increases in their monthly payments as credit card companies respond to the Fed’s lifting of the benchmark fed funds rate. Card holders should think about either paying their debt down (the preferable route) or transferring their balances to cards that offer 0% rates.

Finally, let’s not forget that the reason the Fed raised rates is because policy makers believe the U.S. is finally healthy enough to absorb the higher borrowing costs that will eventually follow liftoff.

Their confidence stems primarily from a healthy jobs market that shows signs of strengthening into 2016. That will mean improved prospects for job seekers and higher wages for workers after years of stagnant earnings growth.

In other words, a gradual return to “normal” interest rates should be viewed as an overall positive for U.S. consumers.