Federal Reserve raises key interest rate

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Here is how it will affect most consumers

The Federal Reserve Open Market Committee has voted to raise its key interest rate .25 percent, the third rate hike this year.

That puts the fed's discount rate in a range of 1.25 to 1.5 percent, and the move will likely affect millions of consumers. The Fed discount rate has almost no bearing on mortgage rates, but it does influence auto loans and credit card rates.

The rate of auto loans, near historic lows, may rise slightly, adding very little to the average car payment. John Ganotis, founder of CreditCardInsider.com, says the impact on credit card rates may be felt more deeply.

"If you're carrying any credit card debt, your interest rate is likely going up with each Fed rate increase,” Ganotis told ConsumerAffairs. "Almost all credit cards have variable APRs, which means they're tied to the Fed rate."

That means when the Fed rate is increased a quarter point, consumers will likely see that same increase in the interest rate they pay on credit card balances.

Peddling into a headwind

"It's like peddling into a progressively stiffer headwind," Greg McBride, CFA, Bankrate.com's chief financial analyst said in an interview. "You have to work harder and harder to pay down that debt."

When interest rates rise on credit card balances, it doesn't necessarily impact the monthly payment, but it does mean consumers will have to spend more to pay off the debt. That usually extends the time it takes to pay off the balance.

While a quarter of a point seems like a small increase, McBride says the cumulative effect is what should concern consumers. He notes this is the fifth interest rate hike in the last two years, meaning the rate has gone up 1.25 percent in that time. The Fed has suggested there may be more rate hikes in 2018.

Interest on bank accounts

If interest rates are going up, it stands to reason that will be good for consumers with money in the bank. Shouldn't they expect to earn more interest -- which has been near zero percent in recent years -- on their deposits?

"Interest rates paid on deposits are not getting back to normal so much as establishing the new normal," McBride said. "And even then, you have to go out and search for it, it's not going to land in your lap."

That's because there aren't uniform increases in rates on deposits among all banks. McBride says consumers will find that online banks, community banks, and credit unions will have the best rates. The large national and regional banks will pay a lot less.

"There's a big difference between what the top yielders are paying and what the average bank is paying," he said. "You really have to shop around."

The Fed's decision to boost its key interest rate appears to be in response to continued signs of increased economic growth. Policymakers have set a goal of keeping inflation at no more than two percent.

Boosting rates is one tool for keeping wages and prices from rising too quickly. Neither have shown signs of doing so, however, and inflation remains below two percent.

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