Interest Rates are Getting Higher - What Does That Mean for Me?

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In this article, we discuss what raising interest rates can mean for the consumer.

The Federal Reserve recently announced a rate increase. What does that mean for you?

The Federal Reserve Open Committee (FOMC) recently announced a rate increase. Before you dismiss this as news only relevant to the finance- or bank-types, let's take another look.

Interest rates set by the FOMC impact the rates banks charge customers. If you have a savings account, student loan, credit card debt, or a home mortgage, changing interest rates can affect you.

A Look Behind the Curtain - why does the Fed raise interest rates?

Typically, the FOMC raises rates because they want to slow down some aspect of the economy. In recent times, the problem has been inflation. Inflation results in your dollar losing spending power - so a gallon of milk or cost of a take-out meal goes up, and you need more dollars to make the purchase. Theoretically, this can be no big deal if your income increases at the same rate of inflation, which usually occurs when inflation is around 2%. However, when year over year inflation gets too high, it's hard for income to keep up. US consumers feel like their income doesn't go as far, or they can't save as much as they had been saving. The Federal Reserve Bank has a government mandate to keep inflation under control. When they raise interest rates, that makes borrowing more expensive and eventually, helps to slow down inflation.

Why should you care?

Are you planning a big purchase that you want to finance, such as a new car or home? If so, interest rates you pay for financing those purchases will be impacted by what the FOMC does. Talk to you lender about what rates you may qualify for.

While you don't have control over what the FOMC does, you do have control over other components that go into the calculation of how much interest you will pay on your loan.

When lenders examine whether to give you a loan, they look at your personal credit history and qualifications. You can improve your personal credit score through paying your bills on time; paying down debt (this improves your debt to available credit ratio); and not opening too many new lines of credit at one time. Keeping your credit score high is something you can control, no matter what the FOMC decides to do about interest rates.