Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 1.75 percentage points, from 0.25% in December 2015, to 2.00%. The Fed is expected to raise rates another 25 basis points on Sept. 26.
MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. In short, we find Fed rate changes have wide-ranging implications for consumers.
- Credit card borrowers are currently paying $110 billion in interest annually, up $31 billion from the annual $79 billion they paid prior to the first Federal Reserve interest rate hike in December 2015, making introductory 0% APR deals all the more attractive.
- Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2018, depositors earned $26.8 billion in interest on their savings accounts, up $16.8 billion from the $10 billion they earned in 2015.
- According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 1.92 point increase since December 2015. Credit card rates will continue to rise in line with the Fed’s rate increases, and if the Fed raises them again, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
- Student loan and auto loan rates have also risen sharply, but only half as much as credit card rates, in part because they are long-term forms of lending that are less reliant on the short-term federal funds rate. Federal student loan rates are set based on the 10-year Treasury note rate each May.
- Savers at big banks have seen little change, with the average savings and CD account passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks. Online banks have aggressively raised rates, and now offer rates in the 2% range, versus just 1% in 2015. That’s over 20 times what typical accounts pay.
Let’s take a closer look at how the Fed rate hike impacts different financial products:
Credit cards
Most credit cards have a rate that’s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 1.92 points, roughly in line with the Fed’s increase of 1.75 points.
That said, consumers can still find attractive introductory rate offers.
For example, 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.
Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.
The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.
The danger of such a small increase in the monthly payment is complacency. Remember that by paying the minimum due, you could be in debt for more than 20 years.
Rates are expected to keep rising, so it makes sense for consumers to lock in a low rate today. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.
Savings accounts
On average, savings account rates haven’t changed much since the Fed started raising rates. That’s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don’t shop around to find higher rates at online banks and credit unions.
Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed’s rate hikes work in your favor.
Back in 2015, it was rare to see savings accounts pay 1% interest.
Today, many online banks are competing for deposits by offering savings account rates approaching 2%, flowing through about half of the Fed’s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data: In the 12-month period ending June 2018, depositors earned $26 billion in interest on their savings accounts, versus the $10 billion they earned in 2015.
CDs
CD rates have moved faster than savings rates, up 0.19 points for 12-month CDs since the Fed started raising rates. That’s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.
But that rate rise doesn’t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.
The rates on 1- and 2-year CDs at online banks have been increasing rapidly, and are now well over 2%, reflecting much of the Fed’s rate increases since 2015.
The rates on 5-year CDs have not been increasing as quickly. As a result, the rate curve has been flattening.
A reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.
And if long-term rates start to rise, you can redeploy or build a ladder in a year.
Student loans
Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 5.05%, up from 4.30% before the federal funds target rate began to rise.
Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.
For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.
Personal loans
Personal loan rates tend to be driven by many factors, including an individual lender’s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.65 basis points.
Auto loans
Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.
But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.
Mortgages
Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage rate has increased from approximately 3.9% to 4.6% as of Sept. 13. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate increases, and it’s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.
What can consumers do
Rates are only going to go up. That means life is going to get more expensive for debtors, and more rewarding for savers.
If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.
If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.
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Barclays is one of the oldest banks in the world. Although they’re based in London, they do have a U.S. presence and offer competitive rates on their CDs and savings account. Currently, they’re offering some of the highest CD rates in the market, and they have an edge over the rest of the institutions on this list: they don’t require a minimum balance to earn the APY or open an account. Deposit as little or as much as you’d like into a term of your choice and you can start earning interest as long as the account is funded within 14 days of opening the CD. Additionally, your funds are insured through the FDIC.
CIT Bank is a bank subsidiary of the publicly traded financial holding company, CIT. Established in 2009, the bank has quickly grown to procure over $42 billion in assets. They’re currently offering one of the highest CD rates available. With $1,000 minimum deposit amount, you can earn a 2.20% APY on a 12-month CD.
PenFed is a credit union that offers very competitive interest rates. You need to join the credit union in order to benefit from their products. If you have a military or government affiliation, it is free to join. Otherwise, you would need to join an organization like Voices for America’s Troops, which costs $17.00. Once you are a member, you can open PenFed products (including this certificate) online. Your deposit would be insured by the NCUA, which is the National Credit Union Administration. There is a $1,000 minimum deposit for the one-year certificate.
CD Bank is the online division of TBK Bank, which is located in Dallas, Texas. With the help of TBK Bank’s backing, the two institutions have over $3 billion in assets. Currently, CD Bank is offering a 24-month CD with a 3.00% APY. There is a steep minimum deposit amount of $10,000, but your deposit is FDIC-insured.
CommunityWide Federal Credit Union was established in 1967 to provide quality financial services to those residing on the west side of South Bend, IN. Today, the credit union operates similarly even though they’ve expanded their footprint in Michigan. Thanks to their online services, however, their able to service customers nationwide. Anyone can become a member of this credit union if they are a donor member of one of their partner organizations, such as the Y.M.C.A. Once you become a member, you can apply for their 24 month CD. You’ll need to deposit $2,000 in order to earn their outstanding 2.90% APY. This account can be managed online or through their mobile app. Deposits made to Communitywide Federal Credit Union are insured by the NCUA.
Once again KS StateBank lands a top spot on our list. Its 5-year CD has an APY of 3.37%, which is one of the highest currently available. You’ll only need $500 to deposit to open the account.
Virtual Bank, a division of IBERIABANK, is currently offering an introductory rate on their money market account that is the highest available. This rate is guaranteed for 12 months and will adjust to the standard rate that is in effect at the time. New customers can earn the 2.01% APY by depositing a minimum of $100. While there isn’t a minimum balance requirement to earn the APY, there is a balance requirement to avoid incurring the $5 monthly service fee. All you’ll have to do is maintain a daily minimum balance of $100 and they’ll waive the monthly fee. While this account doesn’t have any check writing capabilities, you can easily move money in and out of the account via ACH. Virtual Bank has a mobile app, that has the mobile check deposit feature, in addition to their online banking platform.
If you have student loan debt, you probably are not very excited to see Sallie Mae at the top of this list. However, many people are unaware that Sallie Mae also operates an internet-only FDIC-insured bank with some of the best interest rates in the country. You can earn 1.90% APY, compounded daily and paid monthly. There is no minimum balance and no monthly maintenance fees. You will have check-writing capabilities (although the standard money market limit of six per month applies to this account). The easiest (and best) way to fund and access your funds is via electronic transfer from your existing checking account. If you want a simple account with no fees and check access – this is a good bet. Sallie Mae has just recently increased the APY, making this one the best rates in the country.
ableBanking is a division of Northeast Bancorp, a community bank headquartered in Maine since 1872. The bank has over $1 billion in assets, and your deposit would be FDIC insured up to the legal limit. At 1.85% APY, this is the highest money market rate that we have been able to find (from a bank) in the country. There is a minimum deposit of $250, no monthly fee and you do not need to be a resident of Maine (any US resident can open an account). Unfortunately, the account does not come with check-writing privileges and there is no ATM access. You can deposit and access your funds via ACH (electronic transfer), which can take a couple of days. Just remember: there is a limit of 6 withdrawals per calendar month. When we called to ask questions about the account, we could reach a customer service representative very quickly. This is a good option from a small bank with a great high rate.
You may think of credit cards when you think of Capital One, but don’t overlook their deposit accounts. While they don’t require a minimum deposit amount to open the account, you will have to maintain a balance of $10,000 or more to earn their 1.85% APY. If your balance is less than that, you’ll earn an APY of 0.85%They don’t impose any monthly fees, and while they don’t offer checks, they do provide you with an ATM card that you can use to withdraw up to $1,000 per day. You can make an unlimited amount of withdrawals from an ATM per month, but remember that you’re limited to making only six transfers per cycle due to Federal Law. However, Capital One will close the account if you go over six transfers three times within a 12-month period. This is an online-only account, so you can’t go to a branch to open or maintain the account. Fortunately, they make banking-on-the-go easy with their mobile banking app.
Self-Help is a credit union that anyone can join. If you don’t live, work or worship in one of their eligible counties, you can join by donating $5 to the Center for Community Self-Help. The contribution is tax deductible and will make you eligible for credit union membership. (You can learn more about how to join the credit union here.) At a credit union, your funds are insured up to $250,000 – but it is by the NCUA instead of the FDIC. The money market offers an APY of 1.57% on balances from that are at least $500. You also need to maintain the balance during the month – otherwise you will be charged a monthly maintenance fee. You are allowed 6 free withdrawals or transfers from the account each month (including checks).
