How the Fed Interest Rate Affects Consumers

                                        

On December 16, 2015, the Federal Reserve agreed to increase the federal funds rate (federal reserve interest rate, key interest rate, fed funds rates) by 0.25%  which has remained stagnant for the last 10 years. The federal funds rate is the interest rate that banks and financial institution use to lend money to consumers and applies to those with good credit. The rate affects the entire economy including employment and inflation.

The prime rate is also affected by the federal funds rate. The prime rate is usually equal to or near the federal funds rate. The prime rate is the rate banks lend money to one another and affects the interest rate for mortgages, small business loans and personal loans.

The federal funds interest rate influences stock and bond interest rates, consumer and business spending, inflation, and recessions. It will take several months for consumers to see the impact because it usually takes at least 12 months for the effects of any increase in interest rates to be felt by consumers.

How Interest Rates Affect Consumer Spending

• Interest is the amount of money that lenders earn when they approve a loan that the borrower repays. The interest rate is the percentage of the loan amount that the lender charges to lend money to a borrower allowing borrowers to access money immediately.
• An increase in interest rates reduces consumers’ disposable income and consumers must reduce spending on personal goods and services and business goods and services. This will result in a reduction in sales and revenue for businesses. Since the interest rate increase is small it may not have a huge impact on business owners but may affect small business owners who may be struggling to make payroll and accounts payables.

How the Interest Rates Affects Consumers

Overall, the impact will be small for consumers. However, if you owe large amounts of debt you may see an increase in your minimum monthly payment and finance charges. Here are some ways consumers will be impacted:

• Banks will make fewer loans to consumers and businesses - makes borrowing money harder and more expensive
• Consumers with variable interest rate credit cards or mortgage loans will pay more in interest
• Variable student loan interest rates and student loans approved after July 1, 2016 will be impacted
• Home equity loans, auto loans, variable or ARM Mortgage loans, business and personal loans
• Earn more money on savings accounts and CDs (certificate of deposit accounts) - open a savings account or contribute more to an existing savings account
• Money market accounts
• Retirement accounts - May earn more on your retirement and 401K account
• Pay more in interest over life of a loan
• Stock prices may fluctuate, return on investments may decrease
• Consumers with good credit can still take advantage of lower interest rate offers and perks

How the Interest Rates Affects Inflation

• The federal funds interest rate affects inflation which is the rise in the price of goods and services over time. When consumer spending starts to decline, the inflation rate will decrease.

How Interest Rates Affect the Stock Market

• The federal funds interest rate determines how investors invest their money. CD (certificate of deposit), stocks and T-Bonds are affected by rate changes. Stock prices will decrease. When interest rates increase, the demand for lower yield bonds decreases resulting in bond price decrease.

How to Shield Interest Rate Increases

• Pay down as much debt as possible or totally eliminate debt
• Refinance existing loans to a lower interest rate or fixed interest rate
• Exchange variable credit cards for fixed rate credit cards
• Make large purchases within the next 6 months such as an auto, home, business loan, personal loan

Upcoming Credit Card Changes in 2010

The Credit Card Accountability, Responsibility and Disclosures Act or CARD Act that was signed on May 22, 2010 provides changes to credit card rules and guidelines. The CARD Act will protect consumers from illegal and deceptive tactics used by credit card companies for years to earn extra money from unsuspecting consumers. Many of the changes go into effect on February 22, 2010, however some changes began in August 2009 and additional changes won't begin until August or December 2010.

Shortly after the bill was passed through summer 2009 many credit card companies began closing accounts of consumers with high balances; increased balance transfer fees, annual, late and over-the-limit fees such as Chase and Bank of America. Bank of America was also the first bank to begin charging the $3 ATM fee.

Credit card regulations and disclosures will be easier to understand and more transparent but at a high cost. They will be additional or higher upfront costs for the consumer because of the CARD act. This will greatly impact lower to middle income and consumers with bad credit who are only able to make the minimum payments. Here are some high points of the CARD act:

1. Existing Balances. Limit interest rate hikes on existing balances in certain instances.

2. Term Changes. Changes in terms on accounts cannot occur without 45 days advance notice.

3. Under 21. Credit offers can not be made to anyone under 21 unless they have an adult co-signer or can provide proof that they have enough income to repay the debt.

4. Universal Default. Universal default which increases interest rates based on payment history for other accounts would not be applied to existing credit card balances but is still allowed provided credit card companies give at least 45 days advance notice.

5. Paying Bills. Credit card payments are due at least 21 days after the monthly statement is mailed.

6. Opt Out. Consumers can opt-out or reject certain changes in the terms on the credit cards. Opting out allows the consumer to pay off the balance in five years in exchange for closing their account.

7. Due Dates. Credit card companies have to set payment cut-off times no sooner than 5pm on payment due dates and payments due on weekends or holidays are not subject to late fees.

8. Over-the-limit Fees. Consumers will now have the option to "opt in" for being charged over-the-limit fees. Those who opt-out would be unable to exceed their credit limits and will be charged a fee.

9. Subprime Credit. Consumers with bad credit who get subprime credit cards are charged upfront fees but cannot exceed 25% of the available credit limit in the first year of using the card.

10. Minimum payments. Credit card companies must disclose the risks of making only minimum payments each month including how long it would take to pay off the entire balance if they only made the minimum monthly payment.

Unfortunately, the CARD act does not cover everything but does provide some help to consumers. The act does not address the issue that there is no maximum interest rate for credit cards and interest rates are not regulated by the government. Interest rates are regulated by each state.

Some credit card companies have raised annual fees to $99 a year including Bank of America and American Express. One bank is offering a credit card with a 79.9% interest rate.

For those who are addicted to their credit cards you may be forced to use cash soon.

Can the CARD Act Stop Creditor Tricks to Keep You in Debt

Credit card companies use hundreds of tricks and gimmicks to keep consumers in debt. According to R.K. Hammer, the credit card penalty fees revenue will reach $20.5 billion in. Credit cards generate more than $2.5 trillion a year. The credit card industry is one of the largest fraud industries in the country. Here are some common traps credit card companies use to keep consumers in debt.

1. The minimum payment trap keeps consumers in debt and in most cases is not enough to cover the interest and finance charges that accrue each month which is why when you send in a payment your balance either doesn't go down or only goes down by a few dollars.

2. No maximum interest rate for credit cards and is not government regulated. Interest rates are regulated by each state.

3. High late fees are charged either when payments are sent after the due date or sent on the due date although the payment was received on time.

4. Credit card monitoring and credit card insurance. There is no need to purchase credit card insurance because there are so many stipulations when signing up for the insurance that it is to your advantage live below your means to pay down debt.

5. Some credit card term change as the wind blows and makes it difficult for consumers to keep up with the changes.

6. The credit card agreement or disclosure is created using fine print to make it difficult for most consumers to read and those who try to read it get frustrated because of the fine print. However, this document is very important and should be read because it tells you all of the restrictions and guidelines for using the credit card.

7. The payment address or due date may change as a way to confuse consumers so their payment arrives late and they get charged a late fee.

The CARD Act of 2009 will eliminate many of these creditor tricks but the credit card companies will still find ways to work around the law to make money. It is best that you read everything you receive from your credit card company, ask questions and know your rights as a consumer. You can find information on the ftc.gov/credit site.

Want a 79.9% Credit Card Interest Rate

There is no federal limit on credit card interest rates so consumers can be charged any rate. Credit card interest rates are usually between 6-36%. Unfortunately, the CARD Act of 2009 that goes into effect in February 2010 will not address this issue that has been plaguing consumers for years. According to NBC San Diego, the First Premier Bank also known as Premier Bank is offering some consumers a pre-approved credit card with a 79.9% interest rate.

The card also requires additional fees such as an account setup fee, program fee, monthly servicing fee and additional card fee which total an additional $199 a month without making any purchases. The credit card offers a limit of $250. The fees are charged on the first month's bill leaving only a $51 remaining balance.

Credit card interest rates are regulated by each state and as we can see interest rates can be any rate a credit card company desires.

Previously the highest interest rates I knew of were 32-36% by a former client of mine. I thought that was insane but 79.9% beats that by a landslide.

This is a real example of why consumers need to repair their credit, pay down their debt and increase their credit score so they won't ever receive these types of pre-approved offers in the mail.