With the economy on the mend, the Federal Reserve ended its asset-purchase program in October, indicating the Fed believes growth and job creation have finally achieved enough momentum to continue without its stimulus.
Now that this quantitative easing is over, interest rates will eventually rise. Here are a few ways this will affect you and your wallet.
Loans
It’s been cheaper than ever to borrow money since the Fed began slashing interest rates in response to the 2008 credit crisis. Soon, the cost of borrowing money at record lows will be a thing of the past.
Interested in buying a house? Consider doing it sooner, rather than later. After all, even if mortgage rates rise by just one percentage point, this reduces your purchasing power by about 11 percent.
To put this into further perspective: If you could afford a loan of $400,000 at a rate of 4 percent, a rate increase to 5 percent by the end of 2015 — which Zillow chief economist Stan Humphries predicts — would mean you could afford a loan of just $356,000. (Find out exactly how much waiting to buy a home could cost you.)
Deposit accounts
The biggest victims of the historically low rates over the past six years have been savers. The good news is that when rates rise, so will the rate on your returns — now likely in negative territory once you consider taxes and inflation.
Granted, it won’t be a straight line up for interest rates, but returns will be higher, which means it’s a good time to beef up your savings account. Credit unions and online banks generally offer the best rates.
Credit cards
When the Fed raises rates, your credit card bills will be higher. Why? Because these days, most of us have variable rate cards, with our APRs tied to the prime rate. And when the federal funds rate changes, the prime rate does, too.
Credit card rates — currently averaging about 15.66 percent — then follow suit quickly. So if you’re carrying a balance, as about half of all cardholders do, start chipping away at this debt before it becomes an even bigger burden.
Related:
- Waiting to Buy a Home in These Markets Could Cost Hundreds
- 7 Tips to Get the Best Mortgage
- Key Factors in Securing a Mortgage
