Calculate How Much More Expensive Your Debt Will Be With the Fed Rate Hike
The Federal Reserve is expected to hike the federal funds rate this week. This is a move that could affect mortgage interest rates, but it could also affect credit card and student loan rates.
While it is more widely known that rate hikes can indirectly affect rates on mortgages, student loans, and other rates as they are actually tied to the short-term market rate, experts say it will more directly affect credit cards.
Of course, if you have debt with a fixed interest rate, you are in good shape, but most credit cards and many student loans have variable interest rates, which means the rate can – you guessed it – vary. For this reason, paying off credit card debt should be prioritized, if at all possible, ”says Kimberly Palmer, credit card expert at NerdWallet.
“Credit cards usually have variable interest rates, which means that consumers will soon feel the impact of a Fed rate hike in higher interest payments,” she says. Brianna McGurran, student loan expert at NerdWallet, adds a few additional tips for student borrowers:
“Since the Fed is forecasting interest rate hikes during 2018 and 2019, if borrowers have considered refinancing their student loans, now is the time to do so. Borrowers should choose a fixed interest rate so that it does not increase with a Fed rate hike in the future. ”
However, keep in mind that refinancing federal loans comes with risks. Namely, you may lose some of the remedies that come with them. “Borrowers need to understand these trade-offs,” adds McGurran. (And we wrote about some of them here ).
If you are a student loan borrower or have credit card debt, how much will this increase affect you? You can use the NerdWallet Interest Rate Increase Calculator to calculate the numbers. NerdWallet calculated last year that with an average credit card debt of about $ 15,000, a 0.25% rate hike would cost about $ 125 more in interest over five years. But you can use their calculator to figure out your own numbers to see how much more you’ll pay over time.
The good news is that “consumers are likely to see higher returns on savings accounts soon, so money can grow faster,” predicts Palmer. “Online banks tend to have some of the highest interest rates and the APY can be expected to rise, as will the federal funds rate.”