What Does a Prime Rate Increase Mean to Me?

Mar 28, 2017

For the last few years, financial experts having been watching the Federal Reserve Bank, analyzing comments from their board to try and predict when the Fed will raise the prime rate. Interest rates had been stuck at near zero since December 2008, and the recent March 2017 rate change was the third quarter percent increase in the past couple years. Major improvement in the U.S. economy since the Great Recession is a positive sign that our economy can handle higher interest rates. The question the Federal Reserve Bank has to answer is not whether to raise rates, but when and how quickly they do so to keep inflation in check without putting the brakes on economic growth.

Sounds pretty interesting, right? Don’t worry, you’re not alone if you find the Federal Reserve and prime rate talks boring. After all, what does it have to do with you? Well, it turns out the prime rate can have an impact on how much money you have leftover after your bills each month.

Borrowing will become more expensive

Do you have a credit card? Most cards have a variable interest rate that is tied directly to prime rate. So, if you carry a balance, you could start to see your monthly interest charges go up. The same holds true for home equity lines of credit, which are variable rate products. Fixed rate loans, like auto loans, aren’t directly tied to the prime rate. So if you already have a fixed-rate loan, you don’t have to worry about a changing payment. However, if the Federal Reserve continues a pattern of raising rates, auto loan rates and rates on other fixed-rate loans could start creeping up. That’s something to consider if you’re in the market for a vehicle loan or personal loan.

You can take action now by paying down loan balances as quickly as possible and avoid adding additional variable-rate debt. Another option is to refinance credit cards and lines of credit into fixed-rate loans; however, a personal unsecured loan may still be pricier than your credit card rate. In the near term a quarter percent rate increase shouldn’t be too big of a shock to your wallet, but monthly payments could become burdensome if rates continue to rise.

Buying or refinancing a home loan

If you’re in the market for a new home, you’ll want to keep an eye on changing interest rates. Mortgage rates can go up just because banks are expecting the Federal Reserve Bank to raise the prime rate – which means a more expensive mortgage payment for you. If you already have a mortgage with a variable rate or a fixed rate greater than 4.5 to 5 percent, refinancing now could be beneficial so you can lock-in a low, fixed rate. Consult a mortgage expert for your options.

Interest rates on savings and certificates

Finally, good news for savers, who have been suffering with low rates on basic savings accounts and CDs for years. While rates are likely to rise, don’t expect any huge bumps. Rates will most likely inch up slowly, struggling to meet or beat the overall inflation rate.