Rate increase to help savers, hurt borrowers

By Eileen Alt Powell
Associated Press

NEW YORK — The Federal Reserve's decision yesterday to start raising rates means that savers will earn more interest on their bank accounts and debtors will pay more interest on their credit cards and home-equity lines of credit.

But not a lot, at least in the short term.

"We're not talking about drastic action here," said Gary R. Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis, Mo. "We're talking about small, incremental changes."

The Fed raised a key short-term interest rate by a one-quarter percentage point to 1.25 percent yesterday, its first rate increase in four years, to keep inflation at bay as the economy picks up steam.

Savers are among the most eager for higher rates, since their accounts have been earning 1 percent or less in interest in recent years.

Edward Cunningham, a retired corporate finance officer living in Madison, Wis., said the low rates were "terrific if you wanted to take out a mortgage ... but punishing if you were a saver."

Cunningham, 83, said that he and his wife, Louise, 82, live on Social Security, a pension and investments but keep a savings account to draw on for travel, special purchases or emergencies.

He said he found an online money market deposit account that pays 2 percent and expects the rate "to go up a little, but not much" after the Fed's move.

The fact is, a quarter of a percentage point increase in interest translates to just $2.50 per $1,000 in savings per year.

At the same time, consumers who borrow money will have to pay more for the privilege.

Interest rates on car loans, which generally are tied to the prime lending rate, have been going up since late March in anticipation of the Fed's move and are likely to rise further, said Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla.

Still, he says, "consumers shouldn't let themselves be bullied into thinking they have to make a buy now because of rising rates" because they won't be moving up too far too fast.

McBride said, for example, that a $25,000 auto loan financed for five years at 6 percent interest requires a $483.32 monthly payment. If the rate goes to 6.25 percent, the monthly payment rises to $486.23 — an additional $2.91 a month. At 7 percent, the monthly payment is $495.03 — an additional $11.71 per month.

The place Americans will most feel the rate increases is on their credit card debt, which currently totals some $750 billion, according to Fed data.

About half of the credit cards in the country have variable rates, which "will go up in tandem with the prime rate, which is driven by what the Fed does," said Robert McKinley, chief executive officer of CardWeb.com Inc. in Frederick, Md., which publishes data on credit and debit cards.

Cardholders could see the higher rates as early as July, he said.

In addition, fees for late payments and penalty rates for consumers who are over their limits or repeatedly late in paying also will go up, in some cases to 30 percent or more as the Fed raises rates, he added.

"For consumers who got kind of drunk on those 'zero percent' offers, this is a sobering up time," McKinley said. Most of the zero percent cards, which promised no interest on balance transfers or new charges for a short period of time, eventually reset at interest rates of 12 percent or more.

Consumers will find far fewer zero percent offers and other specially priced cards as rates rise, he said.