6 Ways the Fed's Interest Rate Hike Could Affect You

Various interest rates written on small squares of paper.

The Federal Reserve is widely expected to raise the benchmark federal funds rate by 25 basis points on Wednesday, but the impact on consumer borrowing depends on the type of loan. While certain consumer interest rates are directly based on the federal funds rate, others have a looser, indirect relationship.

With that in mind, here are six ways the Federal Reserve's expected rate hike could affect your financial life.

1. Credit cards

Credit card interest rates are directly tied to the federal funds rate, so if you owe money on a credit card that isn't interest-free, you can be sure that a Fed rate hike will affect you.

More specifically, credit card interest rates are generally based on the U.S. prime rate, which is in turn tied to the federal funds rate. For example, a cardholder agreement might state that your APR will be determined as "prime rate plus 13.99%."

So, it's relatively easy to determine how a 25-basis-point increase in the federal funds rate could affect you . In terms of interest charges, expect a $25 annualized increase (a little more than $2 per month) in interest for every $10,000 in credit card debt.

2. Auto loans

Here's where it starts to get a little trickier. Auto loan interest rates are not directly tied to the federal funds rate. In other words, there's no rule that says that banks have to increase their auto loan rates by 0.25% after the Fed raises rates.

Having said that, auto loan rates tend to increase as the federal funds rate climbs. As I wrote in a recent article, auto loan rates have increased by about 12 basis points since the last time the Fed raised rates. So, it's fair to expect that auto loan rates will continue to climb as long as the Fed continues its rate hike cycle.

3. Mortgage rates

Like auto loans, mortgage rates aren't directly linked to the federal funds rate, but tend to move in the same direction. However, it's not as strong of a correlation as we see with auto loan rates. Generally speaking, the longer term a loan instrument is, the less it tends to be correlated to the federal funds rate.

In fact, over the past two years, the federal funds rate has increased by a full percentage point, while the average 30-year mortgage rate has barely budged.

Effective federal funds rate data by YCharts .

4. HELOC rates

While mortgage rates are not directly impacted by the federal funds rate, the interest rate you can obtain on a home equity line of credit , or HELOC, will be. Like credit cards, HELOC interest rates are typically based on the U.S. prime rate, with some sort of margin.

For example, the current U.S. prime rate is 4.25% (before the Fed's rate hike). If your HELOC interest rate is determined by prime plus 1%, you currently pay 5.25% on your outstanding HELOC debt. After the Fed increases the federal funds rate by 25 basis points, your HELOC interest rate will rise to 5.50%.

5. Savings and CD interest

It may sound reasonable that a 0.25% increase in the federal funds rate would result in a substantial increase in savings account and certificate of deposit interest rates. However, that's not always the case.

Generally speaking, savings interest rates tend to increase along with the federal funds rate but to a lesser extent. This is one reason why higher interest rates tend to be good for bank profits -- banks typically raise rates on deposit accounts slower than they raise rates on money they lend, leading to higher margins.

In the current rate-hike cycle, consumers haven't been a big beneficiary. In fact, the national average savings account interest rate is exactly the same as it was two years ago, before the Fed started raising rates.

6. Your stock portfolio

Interest rates can certainly have an effect on the stock market, as faster-than-expected rate hikes can be a negative catalyst for stocks.

This is especially true with high-dividend stocks , as rising rates tend to make lower-risk income investments (like Treasury bonds) more attractive to investors, putting downward pressure on dividend stocks .

To be clear, the Fed's expected December rate hike is considered to be a virtual certainty by market experts, and therefore is mainly priced in at this point. The thing to watch will be the Fed's comments and projections about future rate hikes. For example, if the Fed increases its projection to four rate hikes in 2018 from the current expectation of three, it could certainly have an impact on stocks.

Looking ahead

Aside from credit card and HELOC interest rates, the Fed's rate hike won't directly impact much of your financial life. However, it could certainly put upward pressure on auto loan, mortgage, and savings account interest rates, and the Fed's future outlook could affect your investment portfolio.

Finally, it's worth reiterating that the Fed is expected to raise rates an additional three times in 2018, so we could see all of the consumer interest rates mentioned here steadily climb for a while. In other words, your credit card interest charges won't soar overnight, but could get significantly more expensive over the next year or two, and the same can be said if you plan to buy a new car or home.

The $16,122 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies .

The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.