How Fed rate hike will affect your finances

Credit cards

Most credit cards have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate and card holders will feel an immediate pinch.

“Variable rate debt is where you are most susceptible as interest rates rise,” McBride said.

The average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian’s annual study on the state of credit and debt in America. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve.

Tacking on a 25-basis-point increase will cost credit card users roughly $1.6 billion in extra finance charges in 2018, according to a WalletHub analysis. Factoring in the five previous rate hikes, credit card users will pay about $8.4 billion more in 2018 than they would have otherwise, WalletHub said.

However, for those with good credit, there are still opportunities to find a better rate or snag a zero-interest balance transfer offer to insulate yourself for a time from further rate hikes and “give yourself a tail wind toward debt repayment,” McBride said.

Mortgages

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there’s already been a spike since the start of the year.

The average 30-year fixed-rate is now about 4.54 percent — up from 4.15 percent on Jan. 1 and significantly higher than the record low of 3.5 percent in December 2012.

With interest rates rising, adjustable-rate mortgages will certainly be heading higher, too, and those with some types of ARM loans “are sitting ducks for getting another increase,” McBride said.

Many homeowners with adjustable-rate home equity lines of credit, which are pegged to the prime rate, also will be affected. But unlike an adjustable-rate mortgage, these loans reset immediately rather than once a year.

For example, a rate increase of 25 basis points would cause borrowers with a $50,000 home equity line of credit to see a $10 to $11 increase in their next monthly payment, according to Mike Kinane, senior vice president of consumer lending at TD Bank.

Fixed-income funds can also fall

It is more than common for many small (and not so small) investors to see fixed income as a safe haven in which to save their savings. Sometimes you can even find certain financial advisors who sell it as such. But neither of us is right.

This erroneous concept of fixed income investment is induced by its more intrinsic nature, which basically consists of receiving the interest agreed upon in the issue year after year until the maturity of the security. But the truth is that, although it may not seem a priori, fixed income is also low. Today we analyze this paradoxical behavior that is about to reach the markets.

After the last meeting of the European Central Bank, during the subsequent press conference, Mario Draghi once again said that the ECB would maintain interest rates at the current 0% rate, while maintaining the marginal lending facility, the rate at which it rewards excess reserves held by European banks at -0.4%. In other words, the central bank will continue to charge the banks for saving their money in order to stimulate the circulation of money and loans in the Eurozone.

Needless to say, both rates, interest rates and the marginal lending facility, are currently at completely abnormal levels. And they have been there since they historically hit bottom in the first quarter of 2016. The current figures are part of the ultra-expansive monetary policy that was launched by the ECB, after other central banks such as the Fed and the Japanese central bank, in response to the Great Recession that began after the fall of Lehman Brothers in 2008.

But as we have been warning from these lines every time we have the opportunity, interest rates are not going to remain at these levels indefinitely: take this into account in your financial decisions, and especially when you’re counting on a mortgage application. In fact, the light is already visible at the end of the rate tunnel at 0%, and there is less and less time left for rates to return to their upward trend. The ECB believes that the storm in Europe is already breaking out, and that the herd can therefore now be removed from the shelter.

The truth is that, as it could not be otherwise, the financially orthodox Germany was the first European corner from which they began to demand a rate hike from the ECB quite a few quarters ago. In fact, the famous German”five wise men” have already urged the Draghi to do so.

The ECB’s response has been to state that it will not only maintain current interest rate levels, but also seek to maintain psychological stability among market participants. The aim is to help the business climate in the Eurozone, so as not to”scare” it off” prematurely: for European economic operators, a rate hike would be a significant turning point marking the end of an era.

But at the ECB, what they say is one thing, and what they think is another. In Frankfurt they are well aware of the current economic situation, and in fact behind the scenes there is already something moving in terms of interest rates. Thus, it is common knowledge that the ECB has already begun to discuss the end of monetary stimuli, including ultra-expanding interest rates. In fact, strong hands and smart investors, which often include the”professionalised” bond market, have already begun to discount this scenario, and bond prices have picked up.

Fixed’ income is also falling, so they are not surprised when they see a negative return on their fixed income funds. In fact, fixed income is falling precisely in the upward cycles of interest rates, in one of which we are about to enter Europe. The obvious question that I hope is being drawn in their minds is: And how is it likely to come down? We analyze it for you in the following lines. You’ll see how it has all the market logic.

Obviously, if you as an individual investor buy a fixed income security, whether it is a bond bond or a letter, in the fixed income securities market (or primary market), you will agree to a return in exchange for lending your money to the state (or a large national company). If you hold this security in your portfolio until maturity, you will not see any negative returns at any time, and will end up receiving the initial capital invested, in addition to the return agreed upon at the time of purchase.