Fed Interest Rate Increase Means Less Money for Consumers

By R. David Michaels

Every politician who wants to hold onto their current office has a booming economy on their wish list. When the economy is expanding, joblessness decreases and wages increase. That keeps pressure off of politicians and other issues are less significant as the headlines glow about the economy. As Bill Clinton said when facing presidential re-election, “It’s the economy stupid.”

Currently, we are in a long-running bull market and an economy that is expanding by 2.8% annually. To top that off, reports from October 2017 show consumers are facing 1.4% inflation and the jobless rate is 4.1% which is considered full employment. While this is good for the average Jane and Joe, it has officials at the Federal Reserve Bank concerned.

Their concern is inflation. The Fed’s have a target of 2% annual interest. That will halve consumers’ buying power in 36 years, or a generation, is mystifying to this writer. Inflation makes revenues and growth appear through price rises where none may exist. Of late, the fact that the interest rate is sticking in the low to mid -1% range is “a mystery” when considering economic and job growth, says Janet Yellan, the Federal Reserve Chair.

Another concern to the Fed is the tax cut from the Republican’s tax law. The economic boost from consumers being able to keep more of their wages from the Uncle Sam is anticipated to raise inflation, and the corporate tax rate should allow companies to invest into growth and research to grow their business. History shows that these factors do push inflation, and the Fed wants to keep that at 2%. So, how does it achieve that aim?

Its tool is the short-term interest rate, or what banks charge each other to borrow money from each other. Because money costs the banks more, they pass that on to consumers by raising the interest they charge on credit cards and variable rate loans. The Fed in this way hopes to slow economic growth by giving more of your money to the banks. That tax cut that is supposed to put more money in your pocket is simply moved to the banks if you have outstanding balances on your credit cards or a variable rate mortgage. Before we look at that, let’s focus on what the Fed has planned.

It has moved the interest rate up in quarter point increments in recent quarters. The Feds plans to approve three more in 2019 and two more in 2020. Its stated plan is to have the interest rate at 3.1% by 2020. In other words, in the next 2 years, you can expect to pay 1.6 to 1.85% more to utilize credit than you were in early 2018. In the next year, you will pay about 1% more than you are paying now.

Credit "gurus" such as Dave Ramsey say you can avoid this by just not using credit. How real is that if you are not, as he is, a multi-millionaire? The basic truth is that an average person must utilize credit to obtain a car or home loan. If you do not have a good credit history, the creditor will use that against you by increasing your down payment and the rate of interest it charges you. Because you need to use credit, we at Credit Score Maestro advocate that you learn and practice the Disciplined Credit Philosophy. It will help you optimize your credit use and current income to build a stellar credit history and credit score. Face it, credit is a staple of everyday life for most people; they just do not know how to use it to their advantage and allow bankers to gain profits that should have become the consumer’s savings.

If you have a credit card balance or other variable rate credit extension, every time the Fed increases rates, you pay more. That means you must earn more or you will have to sacrifice something to maintain a budget. On average, Americans owe about $20,000 in credit card debt. If the interest rate increases 1% that results in a $20 addition to the monthly bills; when we consider a 1.85% increase, that’s $55 more to pay. For those who cannot fit that into their budget and carry that over to increase the amount owed, the finance charge increases the next month due to the larger balance. It can become a never ending cycle of debt if you are not managing your game to eliminate fees and interest. The bottom line here is that interest rates and inflation are going to increase, and it will cost more to use credit.

Do you have a plan to assure you can maintain a budget that allows you to grow savings rather than increase your debt load? The sad fact is that most people do not have a plan and they just go about life and pay what they are told they must pay. Meanwhile, the hole gets deeper and deeper. This is not necessarily their fault, for neither their schools nor their parents taught them how to master personal finance in today’s credit based economy. It is more than just paying your bills on time. I have spoken to lots of older folks who profess to have upper 700 or even 800+ credit scores. Most of them are retired and have paid off their home and have a very little, if any, debt. Of course they have a good score. Yet, many of them have inadequate savings accrued and cannot enjoy the quality of life they were accustomed to when younger. Some wonder if they have the financial power to make to their last days.

The question I have for such people is how much extra interest did they pay because they had only an average or below credit score when they financed their house or a new car? They cannot answer that question. We gave an example on page 10 of Winning the Credit Score Game based upon press time interest rates on relevant credit scores. In that example, we considered buying a $280,000 home at credit scores of 620 and 760. The difference is the person with the higher credit score paid $75,184.35 less in interest over the life of a 30 year mortgage. That means that each month the person with the 760 credit score had $208.89 more buying power each month. That savings becomes hundreds of thousands when it is invested for the longer term and compounded.

The question for you is: does your current plan achieve wealth for yourself or for your bankers? One thing you can count upon is that the economy will boom and inflation and interest rates will rise. Another is that many people will use those boom times to acquire more debt. Then, when the down turn comes and cash is not so easy, they begin to fall into delinquency. You must manage your role in the Credit Score Game or the bankers will manage it for you. Take control and get a plan optimize your credit use and current income.

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