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How latest Fed rate decision affects rates on credit cards, mortgages, savings accounts

The Federal Reserve headquarters in Washington, DC. (Dan Smith/Wikimedia Commons)
December 25, 2018

A parade of Fed rate hikes this year is starting to make a dent in the wallets of American borrowers.

Here’s the good news: Bank customers are also starting to see noticeably higher savings rates.

With the Federal Reserve set to announce a fourth interest rate hike this year Wednesday, rates on credit cards, adjustable-rate mortgages and home equity lines of credit are likely to rise, experts say, increasing consumers’ monthly payments. All are revolving loans with variable rates that are directly affected by the Fed’s move.

The Fed is virtually certain to lift its benchmark short-term rate by a quarter percentage point to a range of 2.25 percent to 2.5 percent. It will have bumped up the key rate nine times since late 2015.

“They’re accumulating and the (total) impact is large,” says Tendayi Kapfidze, chief economist of LendingTree. “You need to stay on top of it” so consumers, for example, can consolidate credit card debts into a lower-rate personal loan and bank customers can snag the highest CD or savings rates.

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Monthly payments on a new auto loan also could edge higher, though many car buyers might not feel it because of auto dealer incentives. And the effect on 30-year mortgages and other long-term loans would likely be subdued.

Here’s how the moves could affect consumers:

Credit cards, HELOCS, adjustable-rate mortgages

These loans will become more expensive within weeks since their rates are generally tied to the prime rate, which in turn is affected by the Fed’s benchmark rate.

Average credit-card rates are 17.6 percent, according to Bankrate. For a $10,000 credit-card balance, a quarter-point hike is likely to add $2 a month to the minimum monthly payment, says Nick Clements, co-founder of MagnifyMoney, a personal finance website. The cumulative effect of nine hikes since late 2015 is an extra $18 a month, says Greg McBride, Bankrate chief economist.

Rates for home equity lines of credit are much lower at 6.27 percent, Bankrate figures show.

By contrast, rates on adjustable-rate mortgages are modified annually. So the impact may hit at once. Rate hikes this year have pushed up average rates by about half a percentage point to 4.04 percent. That has increased the monthly payment on a new $200,000 mortgage by about $70, according to MagnifyMoney.

Fixed-rate mortgages

The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly. Those rates more closely track inflation expectations and the long-term economic outlook.

The average 30-year fixed mortgage rate has already climbed from about 4 percent in early January to 4.63 percent, largely because investors expect federal tax cuts and spending increases — along with a healthy economy — to push inflation higher. The likely rate hike on Wednesday is already baked into mortgage rates.

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Existing fixed-rate mortgages are not affected.

Other Fed moves could also play a role. A year ago, the Fed announced that it’s gradually shrinking the bond portfolio it amassed during and after the financial crisis in a bid to lower long-term rates. That likely has a greater effect on fixed mortgage rates.

Bank savings rates

Since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on the deposits customers make.

Don’t expect a fast or equivalent rise in typical savings accounts or CD rates, many of which pay interest of 1 percent or less. Those rates have barely budged the past year despite the Fed’s hikes.

Low rates on loans have meant narrow profit margins for banks for years. They can now benefit from a bigger margin between what they pay customers in interest and what they earn from loans. And since they’re still flush with deposits, they don’t need to attract more to make loans.

Yet a handful of online and community banks, credit unions and money market mutual funds that are hungrier for deposits are paying as much as 2.8 percent on a one-year CD, up from 2.15 percent in March.

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© 2018 USA Today

Distributed by Tribune Content Agency, LLC.