Fed Rate Hike: What It Means, And What to Do

Last week, the Federal Reserve raised its key interest rate to a range of 0.25% to 0.5%. This move didn’t come as a big surprise, though it is a good sign of economic recovery; essentially, experts believe the U.S. economy has healed enough since the 2008 Great Recession to warrant an increase, the first in nearly ten years.

The rate hike may seem minor, but the ramifications of the increase will affect millions of U.S. investors, home buyers and student loan borrowers in coming years. But you’re probably wondering, “Okay, but what does this mean for me?”

Here are a few ways in which these economic changes will trickle down to your wallet, either through credit card use, personal savings, student loans or big spending. We’ve even shared some ideas to get you thinking about how to stay financially balanced through this development – and how you may even benefit!

Pay off and consolidate credit
Paying down credit debt is always a good move. But since most credit debt is tied to variable interest rates, the rate hike means you’ll soon begin paying more on your credit card balances. That makes this is a good time to take a peek at your accounts to see where you can make a smart shuffle. Transfer high-interest credit card balances to cards with lower rates, or see if you can negotiate a lower APR. Remember that the Fed plans on increasing rates a few more times in the next year, so tackling this sooner rather than later is a smart idea.

Put a little more aside
There once was a time when you could earn 3-5% interest on your savings accounts. Well, while those numbers aren’t likely to happen again any time soon, banks are likely to boost rates on money market accounts within the next 8-12 months. So if you can, beef up your savings account a little at a time, and you may start to reap the benefits of increased savings interest by 2017.

Watch those loans

For most student borrowers, your federal student loans have a fixed interest rate. This means the news this week probably won’t affect you much. But if you have private loans, or a federal loan granted before July 1, 2006, it’s likely that your loan has a variable interest rate. This means that a federal interest rate hike will gradually start to effect (increase) your payments. If you’ve been a smart spender and have a healthy credit rating, it’s the ideal time to consider consolidating any private student loans into one fixed-rate loan.

Don’t rush big ticket purchases

Most millennials may not be ready to purchase a home, but some older Gen Y-ers are starting to test out the market. If you’re considering the house hunt, don’t feel too much pressure, yet. While this announcement will cause mortgage rates to gradually rise, experts advise that homebuyers have at least a few years before the rate hike makes a larger impact. It’s good to get organized, but with mortgage rates still sitting at historic lows (around 3.9%), you have time to find that perfect home.

The biggest takeaway from this new federal rate hike is making the connection between the health of the nation’s economy and how that trickles down to all of us as consumers. Despite those inevitable large-scale changes, taking the time to understand how our individual financial decisions can beneficially work with economic shifts is time well spent. With just a bit of foresight and planning you’ll be able to protect your wallet, and hopefully find smart ways to prosper through this and future changes.