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On Dec. 13, 2017, the Federal Reserve Open Market Committee raised the federal funds rate for the third time this year. As a result, the prime rate — the rate banks typically charge their most credit-worthy customers — will also increase. The prime rate is used to determine rates on consumer loan products such as credit cards or auto loans. If you have a fixed rate, the prime rate increase will not impact your existing products. However, new credit products and any existing variable rate products will likely be impacted.
What does this mean for USAA members? Members with variable rate USAA credit card accounts will see the new rate reflected in their January statements, which may lead to an increase in the minimum payment due. Over time, if the prime rate continues to rise, you can also expect to see an increase in fixed rates for any new loans you take out, such as auto loans or personal loans. On a positive note, it is possible that deposit rates could begin to increase slightly.
How can you lessen the impact of higher interest rates?
- Pay off credit card balances in full each billing cycle. The interest rate is irrelevant if you never have to pay it.
- Look for options to consolidate variable rates into a fixed rate. USAA Bank offers fixed rate personal loans. You can use the Personal Loan Calculator and the Debt Consolidator Tool on the page to see if it makes sense for you.
- Consider consolidating variable rate student loans to a fixed rate. For federal student loans, visit the student aid website to learn more about your options. Before making the decision to consolidate, consider any loss of benefits from the original loan. For private student loans, contact your lender to discuss options.
- If you are planning to make a major purchase, such as a vehicle, now may be the time to move. As long as you can afford the payment and other associated costs, such as insurance and gas, then buying before rates increase could save you money.
- Stick to a budget. Those most impacted by an increase in the prime rate typically carry a significant amount of variable-rate debt. Tracking income and expenses can help you avoid overextending and getting into a financial bind.
Rates may be gradually increasing, but they are still far below what we have seen in the past (13% in 1984). Following sound money management principles can help reduce the impact and alleviate the stress associated with increasing rates. As always, USAA is here to help, so feel free to let us know if you have any questions or comments.