How an interest rate hike affects you

The November jobs report, released Dec. 4 by the U.S. Bureau of Labor Statistics, was one of the most important ones in recent memory. It showed the economy as a whole is still improving, as evidenced by the 211,000 jobs created for the month. While unemployment remains at 5 percent, the number of jobs created represents an increase over October's total.

These increases, along with other signs of overall economic stability in recent months, have many economists projecting the U.S. Federal Reserve will likely increase its benchmark interest rate at its Federal Open Market Committee scheduled for Dec. 15-16. Currently, the rate sits between 0 and 0.25 percent.

The last rate hike occurred in 2006, before the iPhone was even announced and when Ben Bernanke was chairman. Today, Janet Yellen is the Federal Reserve Board Chair and Facebook is a multi-billion dollar company with a global reach.

"The U.S. Federal Reserve will likely increase the benchmark interest rate in December."

Since 2008, interest rates have been kept at historically low levels, in an effort to stimulate growth in the wake of economic downturn. With key areas such as unemployment and wage growth rebounding since the recession officially ended, the consensus is that the Fed believes a hike will not be detrimental to the economy. 

As an average consumer, it's important to know that an interest rate hike will indeed affect you. However, this is not necessarily a bad sign. Depending on your financial history and current obligations, it's important to understand how an interest hike may affect you. Even if rates aren't increased in December, it is almost a foregone conclusion it will happen sometime in the near future.

Savings will benefit
Take a look at your current savings account's interest rate. In all likelihood, you haven't earned much in interest because the benchmark rate has remained near 0 percent, according to U.S. News & World Report. With a hike, savings accounts and certificates of deposit will earn higher returns. Keep in mind, however, that the rates set by a bank will likely move at a more measured pace. The type of account also factors into this timeline. No matter what, savers will benefit from the increase over time.

If you're looking to open up your first savings account, or perhaps another one, you'll benefit from starting to look around for the best option. There is no harm in setting up an account now, and then benefiting later, after the rate hike has gone into effect. In particular, you may find it beneficial to open up a CD account now, since these types of savings generally carry higher rates already.

There is no limit to how many savings accounts you can open. With 2016 on the horizon, consider creating specific savings plans such as setting aside money for a housing down payment or for an overseas trip you've always dreamed of taking. Savings accounts and CDs can help you achieve those goals.

Pay attention to credit cards
A benchmark interest rate hike will have a direct impact on any credit card debt you currently carry. You likely have cards with a variable interest rate, and according to NBC News, you can expect to pay more interest over time.

"Work toward eliminating debt to avoid paying more in interest."

Don't worry, you won't suddenly see interest rates skyrocket. But with a rate hike seemingly imminent, you should work toward eliminating this debt to avoid paying more in interest. A good approach would be to prioritize variable debts with higher rates.

Once you knock out one source of debt, move on to the next and so on. This also applies to automobile loans and private student loans, as they too will be affected by the hike.

Mortgage rates will increase
If you're looking to make 2016 the year you become a first-time homeowner, be prepared to have a more expensive mortgage, especially if you have a variable or adjustable rate. A 30-year mortgage for $300,000, coupled with a 0.23 percent increase in the benchmark rate, will result in a monthly payment that costs $35 more per month.

As a potential homebuyer, you may find it beneficial to secure a low, fixed-rate mortgage before the Fed's decision, because a hike will also make it more expensive to shop for mortgages.

The upcoming interest rate hike will affect the economy and bank users everywhere. Before the Fed makes its final decision, understand how higher interest rates will affect your credit card debt, mortgage payments and savings account.

For more information about smart ways to manage your finances, contact Landmark Bank.

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