In December 2015, the Federal Reserve boosted interest rates for the first time in a decade, hiking its benchmark federal funds lending rate from near 0% to a range between 0.25% and 0.50%.
That rate hike holds wide ramifications for Americans looking to square their household budgets, even though the rate rise isn't aimed squarely at average Americans.
"The Federal Reserve doesn't directly set interest rates for mortgages, auto loans, credit cards of other types of consumer financing," explains Greg McBride, a senior financial analyst at Bankrate.com. "But smart borrowers watch the Fed's actions and statements for clues as to the general direction of rates."
In Bankrate's own 2016 interest rate forecast, McBride says consumers can expect some significant changes in both bank and investment savings rates, along with shifts in the interest they'll pay on consumer loans and credit.
For example, Bankrate pegs a big rise in bank certificates of deposit rates, from 0.23% to 0.48% in 2016 (for three-year CDs). One year CD rates will also approximately double, climbing from 0.52% to 1.02% over the same timeframe. Just make sure you "shop around for higher yields," as your mileage will vary from bank to bank on CDs, McBride reports.
There is a downside, however, to higher interest rates with banks.
Aaron Vermut, CEO at Prosper, an online lending company, says banks will be taking a closer look at loan risk levels before extending any credit to Main Street Americans. "While the Fed rate hike has been generally well-received by economists and policymakers, there's a subtle but significant wrinkle for consumers: it's going to cost them a lot more than it will cost banks," Vermut says.
Banks will get more interest with these higher rates, but that's not being passed on to borrowers in their savings account rates, he adds. "What's more, the move lessens the incentive for banks to extend lines of credit to new borrowers," Vermut explains. "With the average American household already owing more than $15,000 in credit card debt, paying more interest and having it be more difficult to take out a bank loan is a tough hand to be dealt."
That's why 2016 will be a year of alternative credit sources and smarter debt consolidation, as Americans look to better manage their finances, he adds.
Banks and lenders, online and off, are already rolling out new interest rate increases, which will make things more expensive for consumers. "Many major U.S. banks reported lifting their prime rate by 0.25% in response to the Fed's announcement, and Lending Club also increased its rates on new loans by an average of 0.25%," LendingClub stated in an email this week to TheStreet. "Therefore, consumers will likely see a rise in credit bills (especially credit cards) for loans from both banks and alternative lending platforms."
Most of Lending Club's loans go toward personal needs like credit card balances, mortgages, student debt, home improvement and auto financing, the company added.
Depending on the health of your bank account the financial impact of widespread credit and lending, interest rates shouldn't be a deal breaker in 2016.
Robert R. Johnson, president and CEO of The American College of Financial Services, says he expects the Federal Reserve to undertake a series of four 0.25% rate hikes over the next year, raising interest rates a total of 1% by the end of 2016.
"Since most credit cards are linked to a prime interest rate, and the prime interest rate generally increases when the Fed raises rates, I would expect the average credit card interest rate to increase over the course of the year," he said. "If the rate hikes are evenly spaced over the year, rates will be, on average, 0.5% higher over the course of the year. The resulting increase in interest payable on credit cards per household would be approximately $48."
You might even do better than that - as long as you pay your credit and loan bills on time, and in full. If so, the Fed rate hikes may be barely noticeable. "Now that the Federal Reserve has raised interest rates, rates across the economy will start going up," said Michael Eckstein, the chief tax accountant at Eckstein Tax Services, a New York-based tax and accounting firm. "But, on a personal level, the effect of these higher rates depends on what loans you expect to take out."
"If you carry a credit card balance, have a variable rate loan, or are planning to take out a loan, you will notice a change," he added. "This difference will be most pronounced in mortgages and other large loans and less pronounced in smaller loans like carrying a credit card balance."
So yes, interest rates will have an impact financially on regular Americans. But it won't be too much, at least right away, and if you pay your bills on time, there's a good chance those rate hikes won't matter at all as 2016 plays out.