Even if you don’t usually pay much attention to financial news, it’s hard to escape the headlines that proclaim the Fed is raising interest rates. You may not be sure what that refers to or what it means for you.
We’ll talk about that in the following article. If you’re going to undertake an action like debt consolidation, a significant rate hike can have a direct impact on you.
What is a Rate Hike?
Let’s break down what a rate hike means. The Fed or Federal Reserve System is the entity that announces when one of these hikes will take place. It’s the USA’s central banking system, and it was created back in 1913.
It came into existence following a series of financial panics. To alleviate financial crises, America created the Fed to have central control over its monetary systems.
When you hear the term “rate hike,” it’s natural to wonder what rate is being raised. The term refers to interest rates when either a consumer or an entity tries to borrow money.
In other words, when a rate hike happens, it becomes more expensive to borrow money. Banks have to pay more to borrow funds. In turn, that causes them to charge businesses and individuals who want to borrow money more interest. That is how the banks recoup their potential losses.
How Might This Impact You?
The Fed raising the target interest rate has a ripple effect on the economy. You’ll often see one of these rate hikes happen at times of economic uncertainty, such as when there’s a bear market.
As a consumer, one of the most likely ways the Fed raising the target interest rate will impact you is if you want to get a personal loan from a lending entity. Banks and credit unions will not give you such favorable interest rates if you try to get a personal loan, even if you’ve got better-than-average credit.
Earlier, we mentioned debt consolidation. When you take that action, you’re typically asking for a personal loan from a lending entity. Once you get that loan, you can pay off several financial obligations at once, like credit card bills.
That often becomes less practical when the Fed raises the interest rate. If you can’t get a favorable interest rate on a consolidation loan, you might have to look into other ways to pay back the money you owe.
The Fed raising the interest rate makes money more expensive to borrow, but it also impacts other parts of the economy. The Fed doesn’t set the interest rate you’ll pay on things like credit card bills, new car loans, and mortgages. However, all these rates usually follow the trend set by the Fed.
Because of this, getting a new vehicle just after a major rate hike becomes more challenging since you can’t afford it as easily. You can expect higher interest rates if you sign up for a new credit card. If you buy a house right now, you’re potentially looking at higher mortgage payments.
What Can You Do?
The Fed raising the interest rate always impacts the economy as a whole, and it generally happens during times of economic downturn or instability. There’s nothing you can personally do to get the Fed to drop the target interest rate again, but you can realize the impact it might have when you plan your current financial moves.
When the interest rate is higher, it’s often best not to buy a new vehicle or open up any new credit card accounts. You might reconsider consolidating credit card debt through a personal loan since the terms you’ll get probably won’t be so advantageous. If you’re house hunting, you may want to hold off on that until the Fed lowers the interest rate and you can get a more favorable mortgage rate.
Most people regard the Fed raising the interest rate as a time of belt-tightening, and you might consider doing the same.