Which of Your Bills Will Go Up If the Fed Raises Interest Rates?

While the Federal Reserve declined to raise interest rates this week, interest rates are still expected to go up sometime this year, which is great news if you’ve been discouraged by the next-to-nothing interest rates banks pay on your savings. But if you have a home equity line of credit or a credit card with an interest rate tied to the rates set by the Federal Reserve, you may be looking at higher payments.

This news can make a big difference if you’re on a tight budget, because your payments can go up later this year. If rates do go up, what will it mean to your monthly payments?

What It Means for Your Mortgage

If you already have a low fixed-rate mortgage, you’ve got nothing to worry about (as long as you don’t move and take out a new mortgage). But if you have a home equity line of credit or an adjustable-rate mortgage, you could see your rate — and payments — rise. But what will it actually cost you?

Let’s say you have a $50,000 balance on a home equity loan that is currently on a 15-year repayment schedule. At a 4.5% interest rate, the monthly payment is $382.50. But at a 5.5%, it goes up to $408.54. And if the rate rises another percentage point to 6.5%, the payment goes up to $435.55. The difference on a mortgage with a bigger balance — say $250,000 — is even larger. (You can use this home affordability calculator to run the numbers for your own situation.)

What It Means for Your Credit Card Payment

Most credit card programs carry variable rates. That means that when interest rates in the economy begin to rise, credit card rates may adjust as well. While you probably won’t see a drastic change immediately, it could well be a “frog in the boiling pot of water” situation; gradual rate increases don’t feel so bad at first, but over time they make it difficult to pay off the debt (this calculator can tell you how long it will take you). It will be even worse if your rates are already steep and continue to rise.

If you don’t have a low rate already, consider consolidating debt with a low-interest credit card or personal loan. If you can’t qualify due to credit problems, a credit counseling agency may be able to help you lock in lower rates and pay off your balances in five years or less.

What It Means for Your Car Loan

Most auto loans carry fixed interest rates but a few have variable interest rates. Auto buyers probably don’t need to worry too much about rising rates, Edmunds.com Chief Economist Lacey Plache told us back in January. “Auto makers can and (I expect) will subsidize lower auto loan rates so as not to scare off buyers and lose the strong sales momentum they are enjoying at present,” she observes.

If you have a car loan at a decent rate, stick with it. If you will be shopping for a vehicle, shop carefully for the right car and the right auto loan before you walk into a dealership.

The Verdict

Whether rates will increase this month or next, the truth is your credit score will likely have more of an impact on your payments than any action the Fed takes. So be sure you review your credit reports and credit scores. Then get to work fixing problems and building the strongest credit you can. (You can get two of your credit scores for free at Credit.com.)