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Understanding Changes in Rates and the Economy
Headlines about inflation, the economy, and rates can be overwhelming. But what do economic uncertainties really mean for you, your accounts, and your debts? We’re here to help you navigate these questions.
The Basics
What is the Federal Reserve and why does it make rate changes?
The Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Two of the Fed’s primary responsibilities are to maintain prices and maximize employment. One action they can take is adjusting interest rates in order to address inflation and market conditions. These interest rate adjustments by the Fed tend to flow through the economy in ways that may impact borrowers and savers.
What is prime rate and what causes it to change?
The prime rate is an interest rate determined by individual banks. It is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans. Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate, which is established by a committee of the Federal Reserve. The Fed makes adjustments to the federal funds rate in order to try to stabilize the market.
How Members Are Affected by Rate Changes
When interest rates increase, you can earn more in your savings account. Virginia Credit Union adjusts savings rates in response to the Fed’s actions and the competition. We will continue to do so and are proud to offer members some of the best savings rates available with all of the benefits of full-service institutions. To earn a higher rate of return, you may want to adjust what type of savings account you’re using. For longer term savings, for example, consider a Savings Certificate or IRA. View our savings services here or speak to a Financial Success Advisor to learn more.
If you have variable-rate debt, your interest rate will be affected by major changes in interest rates. This includes adjustable rate loans, credit card balances, student loans, home loans, and car loans. Applying for one of these loans soon? You will see higher interest rates as well.
A few tips for borrowers when rates increase:
Check offer expiration dates.
If you opened a new credit card with a low introductory interest rate, be sure to check when the new rate will kick in, as it will likely be slightly higher than you anticipated. Try to pay off as much of your balance as possible before the rate begins, or adjust your budgeting to accommodate for a higher monthly payment.
Note where your minimum credit card payments are rising.
While the difference may only be $10-$20, depending on your balance, it will add up over time. Now is the time to pay off credit cards with the highest interest rate, if possible.
Pay off high interest credit cards.
If you owe high-interest debt, consider applying for a lower-interest personal loan or refinancing your car loan. Unsure if the math works out in your favor? Use our calculator to determine if you should consider consolidating your loans.
Limit new loans.
When interest rates are higher, you may want to hold off on applying for non-essential loans. In an emergency, look for fixed rate loans and take advantage of the lower rates you receive as a Virginia Credit Union member.
