What The Prime Rate Increase Means For You
What The Prime Rate Increase Means For You
No Need to Panic
For the first time in just over a year and for the second time since 2008 the Federal Reserve has decided to raise prime rate. Prime Rate, essentially is a benchmark for the lowest rate at which an institution (typically a bank of some kind) can borrow money. Therefore, most banks base their rates around prime.
This was not an unexpected rate hike however, as the federal reserve has been slowly building a case for months about the expected increase. To prevent further instability they postponed the hike until after the election. For all intents and purposes it was a fairly expected rate hike.
Why did the Feds raise rates?
The federal reserve is entrusted with managing our monetary system with the purpose to prevent another great depression from happening again. Generally speaking, they lower rates when the economy is doing poorly to encourage spending. Hence why it dropped and stayed at 3.25% for eight years following the great recession. On the flip side of things, they will raise rates when they feel like the economy is on the up-and-up to try and prevent inflation.
Inflation is when prices increase as the value of money decreases. The experts at the head of the federal reserve system decided to raise rates to be proactive about controlling inflation since the economy has been doing better for some time.
How does this affect me?
It will effect all consumers in some way or another. Unless of course you are one of the few Americans who has successfully gotten by without ever using credit. (Something tells me you probably wouldn’t be reading this post if that was the case…) Some will be effected more than others and it all depends upon your situation, so let’s break it down.
Credit Card Customers
If you have a credit card in your wallet, it’s probably a variable rate card. If I had to throw out a completely un-scientific number, I’d venture a guess that some 95% or more of credit cards are variable rates. That is, a rate that is “tied” to prime rate. By tied we simply mean that it adjusts with the prime rate, both up and down.
Since prime rate has increased, the interest costs of your credit cards is going to go up. Hopefully, a quarter percent (.25%) increase isn’t going to break the bank for you.
Lines of Credit (HELOCs & Personal)
Although very similar to a credit card, a HELOC or Home Equity Line of Credit, is a credit line that uses your home as collateral. Generally this is going to get you a better rate than if you just did a personal credit line with no collateral attached.
Since these are open ended lines of credit, meaning you have the capacity to use or not use at your discretion, they are also generally tied to prime. You will likely see your rate increase after your next statement cycle goes through.
Adjustable rate Mortgages (ARM)
An adjustable rate mortgage is a mortgage, generally with a fixed rate for a period of time, that will ultimately adjust to market conditions. The most common would be 5/1, 7/1, or 10/1 terms. To clarify, a 5, 7, or 10 year fixed period with rate adjustments afterwards.
This type of mortgage is typically reccomended for people who are confident that they will be in the home for no more than the fixed time portion of the loan. Which is fine if that is really how things go down. However, as rates have risen and are expected to at least stay where they are or increase moving forward for the forseable future, you may want to consider refinancing onto a fixed loan before rates get too high.
Anyone looking to borrow money
Finally, anyone looking to borrow money is ultimately going to start paying a higher cost for it soon. While mortage and variable rate (obviously) products will adjust fairly quickly, all other loan types will typically trend upward with this change as well.
If you were considering buying a home, car, or anything that you would need to finance – it may be in your best interest to look at doing so in the near future.
Not looking to buy something expensive? No balances on your credit card and no variable rate loan products? Good news, you don’t have much to worry about!
If you are already in a fixed installment loan and happy with where you’re at, you shouldn’t be impacted much (at least immediately) by the recent rate hike. If you were fortunate enough to get your loan before the change, stick with it and ride it out as long as you can unless your circumstances demand you refinance or move on for other reasons.
Also, if you are a current or prospective Credit Fair-E borrower, you don’t need to worry. Our loans are not tied to prime and we have no intention on making any rate or term changes for the foreseeable future.