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Fed's Rate Bump Impacts Mortgages, Consumer Debt

Americans taking on more debt

March 22, 2018

By SAMANTHA BOMKAMP Chicago Tribune (Tribune News Service)



Americans are taking on more debt, and they're soon going to be paying more for it.

The Federal Reserve on Wednesday raised its benchmark interest rate, citing an improving economy, low unemployment and rising wages. The move will affect millions of Americans by making it more expensive to borrow money, whether that's in the form of credit card balances, car loans or some home mortgages.

This might mean the time is ripe to make a big purchase before interest rates go higher. The Fed already has promised two additional rate hikes this year and more in 2019 as its benchmark federal funds rate climbs from historic lows during the Great Recession.

But there's also a silver lining for savers: Because interest rates have been low for years, it's been tough to gain much extra ground in the form of interest when stashing away cash in savings accounts. The Fed's move will make it easier to accrue interest on a nest egg or rainy day fund.


What Comes First
You'll probably see the first sign of rising interest rates on your credit card bill within a few weeks, said Tendayi Kapfidze, chief economist for loan comparison site LendingTree. That's because credit card companies generally offer variable interest rates that are adjusted in real time according to the prime rate, or the interest rate charged by most major banks to their corporate customers. The federal funds rate and the prime rate are tightly linked, and as one goes, so the other tends to go.

The increase in the federal funds rate announced Wednesday -- 0.25 percentage points to a range of 1.5 to 1.75 percent -- won't make a huge impact for most people right away, Kapfidze said, but it will add up for those who carry a balance and pay only the minimum required.

The average U.S. consumer's credit card balance is $5,644, according to CreditCards.com, which would mean just $14 extra in interest per year, on average. But it would mean an extra $109 in interest until the balance is paid off if you paid only the minimum.

And the rate at which Americans are taking on more debt is rising across the board, according to a recent study from Chicago-based credit bureau TransUnion. While serious delinquencies are going down, average debt for car and personal loans, mortgages, and credit cards all rose between 2016 and 2017.


The Next Steps
Home-equity loans and auto loans with adjustable rates -- most likely those made with a lender outside of the automaker -- will begin to see higher rates next, Kapfidze said. Personal loan providers will soon catch up as well. That's why this is a a critical time to shop around for the best interest rate on any debt you can, he said, especially with rates set to go even higher later this year.

"You definitely have options; it really depends on who is giving out the loan," Kapfidze said.

Kapfidze also recommends consolidating debt through a fixed-rate personal loan to insulate yourself from future rate hikes. It's also a good time to get a copy of your credit report and make sure you understand your total debt so you can make the best decisions in paying it off, he said.


Buyer's Market?
Even though it may seem like a bad time to take on more debt, Lewis Jones, managing broker of Coldwell Banker's Lakeview office, said he's advising clients to buy sooner rather than later.

"We're advising clients to buy now -- interest rates are still historically low," Jones said, noting that potential buyer activity has been rising in the Chicago area recently with the arrival of spring. "We say that a lot, but it's really true now."

"Whenever the Fed says interest rates are going up, (our clients) get a little nervous," he said. "But on a 30-year (fixed rate) mortgage, (the higher rate) is really going to have a nominal effect."

Interest rate hikes will have a greater effect on borrowers with adjustable rate mortgages.


Sage Advice
Organizations that work with vulnerable sections of the population like low-income or older residents have the same, simple advice for their members in a time of rising interest rates: Save as much as you can, work as much as you can, and get rid of debt.

Bob Gallo, AARP Illinois' state director, said that while the organization doesn't specifically counsel members or give financial advice, he thinks older Illinoisans would benefit from rebalancing their portfolios to lean more heavily toward bonds and money market accounts and away from stocks as interest rates go up. But he still would suggest that those who are working continue to work as long as possible in order not to dip into investments and run out of money in retirement.

LendingTree's Kapfidze notes that interest in savings accounts can vary widely as well because not all banks will raise rates at the same pace or by the same amount. It's best to do your research and ensure you're getting the most bang for your saved buck, he said.

Gallo said that in addition to making sound investments, he believes the best defense against financial surprises later on is prioritizing savings.

"I remember that old saying, 'The best time to plant a tree was 20 years ago, and the second-best time is now,'" he said. "The same is true with savings."

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Copyright (c) 2018, The Chicago Tribune

Distributed by Tribune News Service.


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