Fed Hikes Interest Rates Again

12 February 2010

On November 1, 2005, the Federal Reserve Bank [Fed] raised interest rates one quarter of a percentage point. Since Summer 2004, outgoing Fed Chairman Alan Greenspan has been raising interest rates on a regular basis since hitting its low point of just 1%. Now at 4%, Greenspan is expected to raise rates two more times before exiting office in January 2006. Will the higher rates stave off inflation? Will the new Chairman continue Greenspans incremental adjustments upward or will he let rates level off? Speculation is rampant but there is one thing you can know for sure: you will pay more for many of lifes expenses.

A rate hike by the Fed means that you will likely pay more for something including:

Credit cards. Not known for showing much restraint, you can bet credit card companies will continue to jack up interest rates except for their best customers. Rates of 12, 15, and even 21% or more are reappearing.

Mortgage rates. Holders of fixed rate mortgages are fine, but those with variable rate mortgages will pay more. A lot more if they havent felt previous rate hikes and their mortgages are due for an upward adjustment. More money to pay mortgages means less money for disposable items.

Car loans. If you need a new car and can still find zero percent financing, then grab the offer. Car loans, personal loans, home equity loans, home equity lines of credit, loan consolidations, will all continue to increase.

Add in high fuel prices, anticipated hikes in medical costs, and Americans are getting squeezed. With the holiday season fast bearing down upon us, retailers will have to slash prices in order to attract customers who are holding a dwindling cash reserve.

For people not holding excessive debt, the Fed rate increase will be have little or no effect on them. For everyone else, the pinch is on!

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0% APR Credit Cards: The High Interest Rate Solution

03 November 2009

Over the past two years, the Federal Reserve has raised interest rates substantially. Consequently, credit card annual percentage rates have followed suit. Nearly all credit cards tie their interest rates to the prime rate, which has doubled to 8% from 4% during the string of rate hikes that began in 2004. This has led to interest rates on credit cards rising by 30% or more. Since August of 2006, the Federal Reserve has kept interest rates steady, and many economists believe the next move may be a reduction in rates. However, the rate reductions have yet to begin, and credit card interest rates remain relatively high.

For those who carry balances on their credit cards, high interest rates have resulted in higher monthly bills, with many seeing their minimum payment increase substantially. Fortunately, now, more than in recent years, 0% credit cards offer a safe harbor from high rates. There are two basic types of 0% credit cards: those that offer a 0% rate on balance transfers, and those that offer a 0% on purchases. The best credit cards offer 0% interest on both. How much savings can these credit cards provide? Lets take a look at the math.

Lets assume youre carrying a balance of $10,000. If you simply pay the minimum each month, you will accrue close to $2000 in interest over the course of a year, thanks to daily compounding balances (too bad savings accounts dont pay that type of interest). With a 0% balance transfer, you can expect to save all of that money, plus, youll be given time to pay down that debt. When the 0% period expires, not only is there a chance your interest rate will be lower, but, if rates do not go down, you can always transfer the balance to another 0% credit card. Plus, if you make a minimum payment of $150 a month, your balance at the end of the year will be closer to $8200, rather than $12,000. Thats quite a difference.

Now, if youre fortunate enough to have no credit card debt, a 0% interest rate can be handy tool to avoid interest expenses on new purchases and free up some cash in the short term. Need a new fridge? Have to fix your car? Want granite counters for the kitchen? With a 0% credit card, you can defer the cost of these expenses for a year while taking advantage of high interest rates. How? By placing the cash that would have left your bank account into a high-yield savings account and taking advantage of rewards credit cards.

Lets assume you will make $10,000 of purchases over the next few months. Using a credit card with a 0% interest rate and 1% cashback rewards, coupled with a high-yield savings account with a 4% interest rate can put about $500 extra in your pocket over the course of the year.

Of course, not everyone pays their balance in full each month. With average credit card interest rates in the 12% to 15% range, carrying a monthly balance of only $1000 can cost close to $150 a year. Saving $150 in interest charges may not be a fortune, but its surely enough to buy a nice dinner with a good bottle of wine.

No matter how you use your credit card, a 0% interest credit card can have a positive effect on both short and long term cash flows. Given that the alternative is paying more than 12% in interest, choosing a 0% credit card in this atmosphere of high interest rates is a no-brainer.

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