How 3 consumers will feel the Federal Reserve’s interest rate increase


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See what a rate hike means to 3 consumers

The prospect of a Federal Reserve rate hike loomed over the heads of some people like a ferocious blizzard. For others, it was more like a walk in a winter wonderland.

Either way, the Federal Reserve’s decision to increase its key interest rate is going to impact your finances.

But how? We found three people with circumstances that may reflect yours. See what the Fed hike means to them.

Carrying debt on variable-rate credit cards
Carrying debt on variable rate credit cards | Photo courtesy of AJ Saleem

Ajmal Saleem is the founder of a tutoring startup in Houston. For him, credit card debt is inevitable; he has office supplies to buy and employees to pay. Typically, he carries about $6,000 in debt on his variable-rate credit cards.

“Having the higher credit limit as a business owner has allowed me to pay for more expenses,” says Saleem. “Once you have a higher credit limit you are enticed to spend more, but after you spend all that, you start getting hit with interest.”

CREDIT CARD SEARCH: Compare low-interest credit cards on Bankrate.

How does a rise in the federal funds rate affect variable-rate credit cards?

Since most variable-rate credit cards are tied to the movement of the prime rate, which is in turn tied to the federal funds rate, cardholders are likely to see an increase in their annual percentage rate, or APR.

Saleem’s credit card APR is likely to climb over the next months because of the rate hike, but he made a plan to tackle his debt before the new rate kicks in.

“Our goal is to aggressively pay off the debt on our variable-rate credit cards, and pay off the high-interest cards first,” says Saleem. “Hopefully, we can start paying off our debts so we won’t be affected by the higher rates. … But I’ll deal with that when it happens. I’m going to stay positive.”

MORE: Winners and losers of the Federal Reserve rate hike

Savings-focused retiree
Savings-focused retiree Thanasis Zovoilis/Getty Images

Bob Kulick had a successful career; he served as a partner of CiCi Enterprises for 20 years before deciding to sell the company. He has been enjoying life in Dallas as a retiree for five years.

How does a hike in the federal funds rate affect savings accounts and CDs?

CDs and savings accounts will ultimately offer higher rates, but the increase won’t be immediate and you’ll have to shop around for it.

RATE SEARCH: Looking for yield? Compare savings account offers on Bankrate.

Kulik understands what the Fed rate hike means for retirees across the country, who would benefit from higher interest rates on their savings and CD accounts.

When the Fed increased the federal funds rate in December 2015, interest rates on Kulick’s savings accounts increased only slightly. Still, Kulick thinks the latest rate increase will be a positive move for retirees across the country.

“It’s been eight years of basically a zero percent rate, which becomes rough,” says Kulick. “I was fortunate, having sold the business and been in a different position where I could do riskier investments. But my parents are in their 80s and live in Florida; those types of retirees had counted on CDs. That’s where they put their money and counted on being able to live off of that, and they haven’t been able to do that.”

MORE: 6 reasons retirees love it when the Fed raises interest rates

Homeowner with a HELOC
Homeowner with a HELOC | Photo courtesy of Rocke Andrews

Rocke Andrews knows a thing or two about being a homeowner. In fact, he’s the president of NAMB, the National Association of Mortgage Brokers, in Tucson, Arizona. Andrews got a home equity line of credit in 2006.

Andrews says when the Fed raised the rates in December 2015, he was worried it would raise them even more. For homeowners with a home equity line of credit, or HELOC, the federal funds rate hike might hurt.

How does a federal funds rate hike affect home equity lines of credit?

The majority of HELOCs are tied to the prime rate, which is tied to the federal funds rate. The prime rate is typically 3 percent higher than the federal funds rate. So, the increase in the federal funds rate likely means an increase in your HELOC rate.

RATE SEARCH: Want to lock in a home equity loan? Compare home equity loan rates in your area.

Andrews had anticipated a rate hike over the summer, and braced himself for an increase in his monthly HELOC payments from $350 to $400.

“I was considering the option to convert it to a fixed rate, which is substantially higher than the floating rate, but you won’t have to worry about it going up anymore,” Andrews says.

“I would be dreading (a rate hike) because my monthly outgo will go up every month,” Andrews says.

Now, it seems that time has finally come.

MORE: How soon will a Federal Reserve rate hike hit me?