The Federal Reserve’s decision to raise or lower rates affects the everyday financial products you use that are tied to the Prime Rate. This decision could also indirectly affect rates for other products. Here’s a general guideline of how Fed changes affect your wallet:
Your Credit Cards
The majority of credit cards are tied to the Prime Rate. If the Fed raises or lowers the Prime Rate, it will likely directly impact your current annual percentage rate by the amount of the change. This means that more of your payment each month will go towards paying that higher interest rather than paying down your debt. Your best bet is to take advantage of a low-rate environment to pay down your debt before rates increase.
Your Auto Loans
Auto loans aren’t typically priced by Prime. Consumer confidence, auto industry sales volume, and special offers at the dealership are more likely to change auto loan pricing. Since auto loans are almost always fixed rates, rate changes won’t affect your existing loans, just future loans. Plus, because of lower loan amounts compared to mortgage loans, the difference of a quarter percent in a car loan payment amount is fairly insignificant.
Your Savings Accounts
While not directly tied to market rates, yields on deposit accounts might increase or decrease based on the rate environment. This includes savings accounts, money market accounts, and certificates. The good news for savers is that as the Fed raises rates, banks and credit unions tend to follow suit and you could see an improved return on your deposits. As rates increase, you may want to consider investing in certificates which pay a higher percentage yield than savings account, and consider certificate laddering.
Laddering is a creative way to take advantage of the higher interest rates of long-term certificates while still having access to liquid cash over the short term. In a rising interest rate environment, it could be a good strategy for any investor.
Your Home Equity Lines of Credit (HELOC)
HELOCs are typically priced according to the Prime Rate as well, so a change in Prime will change the amount of your payment that’s being applied to interest versus debt. If you are considering a HELOC, lock in a low rate before rates increase.
Another option for accessing the equity in your home is through a cash-out mortgage refinance. If you choose a fixed-rate loan or an adjusted-rate mortgage (ARM) that's fixed for a set period of time, you can have access to cash while locking in your rate and payment.
Although Fed rate changes don’t directly affect mortgage rates, they can affect what’s happening in the Stock Market, which could affect mortgage rates. We’re happy to help assess your mortgage situation with a complimentary consultation.
When it comes to investments you may have that are affected by stock market performance, you should speak with your financial advisor on the best course of action. If you need a second opinion, Rahil Machiwalla, financial advisor with CUSO Financial Services, L.P.*, is available to meet with you for a complimentary consultation. He can answer questions you have about the market and your specific financial plan. Schedule an appointment to speak with Rahil.
We understand that you may have questions about how rate changes might affect your finances. We welcome your call and are happy to walk you through your options. Call us at (800) 649-0193 or stop by your local branch. We are here to help.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to Credit Union members. Please consult a qualified tax advisor for specific tax advice. View CFS Referral Disclosure