Interest rates on credit cards and home equity lines of credit will go up soon as a result of the Federal Reserve rate hike.
The central bank’s monetary policy committee raised the federal funds rate by one-quarter of a percentage point today. The prime rate will rise by tomorrow morning to 4 percent from 3.75 percent. Rates on credit cards and home equity lines will follow, because they are tied to the prime rate.
The Fed held to its forecast for three rate hikes this year, meaning we can expect two more.
What to do
If you carry a balance on your home equity line of credit, or HELOC, pay it down to avoid higher interest payments in the future. The popularity of home equity lines of credit has surged in recent years, as homes have finally regained equity after the housing crash. Many homeowners get HELOCs to fund home renovations or to use in an emergency.
Interest rates on auto loans are not directly tied to what the Fed does, but they probably will rise following this rate hike. It makes sense to finance a car now, before the Fed raises rates yet again.
Mortgage rates went up last week, before the Fed’s action, and they are on an upward trend. This is a good time to shop for a mortgage, right before homebuying season begins. Use Bankrate’s mortgage calculator to figure out how much you can afford to borrow.
Why the Fed raised rates
The economy continues to grow, and appears to be near full employment. That’s a recipe for inflation. By raising the federal funds rate, the central bank is trying to keep inflation from going much above 2 percent.
“They’re saying, ‘Let’s go, let’s get out in front of the curve, let’s take advantage of this opportunity,” says Alan MacEachin, chief corporate economist for Navy Federal Credit Union.
In February, the economy grew by a net 235,000 jobs, which reflects a vibrant economy.
But the Fed continues to keep interest rates “quite low,” notes Federal Reserve Board Chair Janet Yellen. “We are neither pressing on the brake or pushing down on the accelerator.”
For more on Yellen’s news conference that followed the rate announcement, find Bankrate senior economic analyst and Washington bureau chief Mark Hamrick on Twitter, @hamrickisms.