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Prime Rate Increase: What You Need to Know

Dec 22, 2016 | 2 minute read

Prime Rate Increase

DEC 2016 In late December, and for the first time in nearly a decade, the Federal Reserve (FED) increased the prime interest rate. This increase directly affects the interest you’ll pay when you carry a credit card balance or take out a loan, or the interest you earn on your savings accounts and certificates. Interest rates have been low for a long time, leaving many consumers inexperienced with a prime rate increase.

Below, we’ve outlined key information to keep in mind when such an increase occurs.

The fact that the prime interest rate has gone up is a good sign for the economy as a whole, although it might not be as good for your individual family. If you notice your payment amounts increase on your adjustable-rate loans, it’s not because we chose to raise your bill. Adjustable-rate loans are usually tied to the prime rate, so when the Fed raises rates, your loan rate will adjust/increase along with your monthly payments. The government manages this process; they use it to control a variety of economic factors, including inflation and unemployment.

What can you expect?

If you have an adjustable-rate loan, i.e. a credit card, home equity line of credit, or student loan, your interest rate will go up and you’ll pay more in interest for each billing cycle. When the rate hike is a 0.25% increase, it amounts to one dollar in interest for every $400 in principal; the effects should not be substantial on small loans, but larger loans may have you feeling the pinch.

Any fixed-rate loans you have will not be affected. If you’re worried about the impact your adjustable-rate loans may have on your monthly budget, it may be a good time to reevaluate your debts to determine if there are alternative solutions more in your favor.

On the positive side, the interest paid on your savings account, money market account, and certificates will start to inch upward. The interest rates won’t jump overnight, but you can expect to see a gradual increase down the road.

From that you’ll have a general sense of what you’re spending and about how much extra is left over — or how much you’re short. Once you start keeping casual track of your cash flow, you’ll be encouraged to make changes that will improve your financial situation.

A fancy, perfect budget isn’t necessary or reasonable for most of us who can barely pull our records together once a year for doing taxes, much less write down in specific detail everything we spend money on 365 days a year. Simple awareness goes a long way.

The Fed will be watching to see how the increase affects the economy. If the job market and other financial indicators remain strong, you can expect rates to continue inching higher. We can help you evaluate what you have with us, and/or others, so you feel confident and secure in knowing how you’ll be affected with future rate increases. Contact us by phone at: 513.243.4328 or 800.542.4328 or by email at: