By Sean McQuay
f you're a saver, congratulations. Your money may soon be more valuable. If you're indebted, I'm sorry to say that your debt is only getting more expensive.
Either way, the Federal Reserve's decision to boost interest rates by 25 basis points, a 0.25-percentage-point increase, will likely affect you soon. The Fed's decision affects the prime rate, which is generally the best lending rate offered by banks.
Banks are expected to increase the prime rate from 3.5% to 3.75% in the coming weeks. In turn, the annual percentage yields on your savings and the annual percentage rates on your outstanding credit card balances and future transactions can be expected to rise. In fact, your credit card APR will probably see a 0.25-percentage-point increase in the next couple of months. Your issuer might not even tell you the change is coming: Under the Credit Card Act of 2009, issuers don't have to notify you when your card's rate rises with the prime rate. But it can sure cost you.
How credit card interest works
The rate hike affects your credit cards because their rates are variable, not fixed. But the effect is a little different from other types of credit card APR increases.
If your issuer raised rates to make more money, for example, the Card Act would prevent the issuer from applying those higher rates to your existing balances; the new rates would apply only to transactions made after the increase. But when the prime rate rises, the Card Act allows issuers to raise the rates on your outstanding balances in addition to your new transactions.
Consider the average credit card APR of 18.76%, and that the average indebted household pays a total of $1,292 in credit card interest per year. If you add a Fed rate increase of 0.25 percentage point to that average APR, the interest total rises to $1,309 per year.
Spending $17 more on interest per year may not sound like a big deal. But when you consider that more rate hikes are expected as the economy improves, it's easy to see how this could slowly add up. The sooner you pay down your debt, or transfer it to a card with a lower rate, the better.
The golden goose for dealing with debt: 0% APR
If you want to avoid those increased interest rates, I recommend moving your debt to a card with a 0% APR promotion. The prime rate increase affects just about every credit card's ongoing interest rate, but those 0% promotions are relatively immune to changes like these.
Though issuers could bump up introductory interest rates on 0% APR offers, they probably won't. Credit card issuers have continued to offer these promotions since last year's rate hike, which was the first increase in nine years, and they offered them before 2006, when interest rates were much higher. Given the fierce competition among issuers, this probably won't change. For consumers tackling credit card debt, this means you can still pay down your debt interest-free, after moving your balance to another card.
There's a catch: Not everyone can qualify for a 0% APR offer. Generally, you need good or excellent credit. But if you're able to get one of these cards, you can potentially save a lot of money by transferring your balances -- or even just part of a large balance. After the promotional period ends, your interest rates will go up, so it's a good idea to pay down your debt during the 0% period, if you're able.
Chase the upside: Boost your savings
If you're debt-free, congratulations. Now you have more incentive to save your money for the future. Fed rate changes don't guarantee a point-for-point improvement in your APYs, but they can encourage banks to give more back to their consumers.
If there's an increase to savings rates, it will be small -- but any improvement is welcome. The best savings accounts on the market are offering around 1% APY, a far cry from the 5% offered in the early 2000s. Consider this a good opportunity to make the switch to a higher-yield savings account, to ensure your savings grow as much as possible over time.
And if your savings account resembles a mattress, piggy bank or sock drawer, now's a great time to open a proper account. Cash stashed around your house only loses value over time, thanks to inflation, and interest yields at banks help lessen that loss. Opening a bank account may also save you a ton of money in fees: The average annual cost of being unbanked can be as high as $497.33, according to a recent NerdWallet study. Boost your savings by cutting those losses, and take advantage of the potential for rising interest yields.
Nerd tip: If you've had problems with ChexSystems in the past, now is a good time to start fresh. See whether your local bank or credit union offers a "second-chance" program.
A sign of better economic times?
These rate increases, as confusing as they are, can ultimately be a good thing for your pocketbook. The near-zero interest rates we saw between 2008 and 2015 were meant to help the economy bounce back from the financial crisis. Keeping these rates low for too long could ultimately lead to inflation, which could hurt everyone's bottom line -- and it's these low rates that have kept your savings from growing more quickly.
So take a step back. If you're on top of your credit card debt, try saving a little extra. It'll go further. If not, remember that you don't have to start paying more in credit card interest just because the rates go up. Move your debt to a 0% balance transfer APR card, and put the money you might have otherwise spent on interest toward your debt. You'll end up paying less interest on your debt, not more.
Photo courtesy of NerdWallet.
Sean McQuay is a credit and banking expert at NerdWallet. A former strategist with Visa, McQuay now helps consumers use their credit cards and banking products more effectively. If you have a question, shoot him an email at email@example.com. The answer might show up in a future column.