Most experts expect U.S. interest rates to rise in 2015, but no one knows when and by how much.
Rate increases rarely happen with great velocity, though. The last time the Federal Reserve raised the federal funds rate, which banks use to lend money overnight, was in June 2006. It brought the rate to 5.25% — after 17 increases.
By 2008, in the midst of the financial crisis, the federal funds rate was down to zero, where it has stayed.
A jump in interest rates in 2015 could have a big financial impact, however, especially if you are looking to buy a home, have credit card debt or own bonds.
Here is what to expect:
Rates for consumer loans, which include mortgages and automobiles, are bouncing around 3.75%, a quarter percentage point above historic lows reached in May 2013. Greg McBride, chief financial analyst for Bankrate.com, expects a series of rate hikes in the year ahead.
“This is going to be a very volatile year,” says McBride.
Overall, however, the net change will probably be within one percentage point.
For a car buyer, a change from 4% to 5% would be almost imperceptible. The average auto loan is $27,000, and borrowing that much over five years would mean a difference of just $12 a month.
Home loans are another story, so plan accordingly. Over 30 years, that one percentage point difference in interest rates on a $100,000 mortgage would mean you would pay about $22,000 more, according to an example provided by Quicken.
Consumers looking to roll over credit card debt to a zero percent balance transfer should act fast, because offers have never been more generous.
“We don’t expect offers to get better,” says Odysseas Papadimitriou, chief executive officer of CardHub.com, which rates credit card offers. Duration of deals is at an all-time high, at an average of 11 months, and the average balance transfer fee is only 3%.
These deals could disappear if the Fed raises rates significantly or a tanking economy causes default rates to surge, Papadimitriou adds.
Consumers tend to focus on the length of the balance transfer deal, which can be up to 24 months, but Papadimitriou says you must also consider the monthly payments, annual and transfer fees and the interest rate after the introductory period ends.
To learn how much you will save each month, use an online calculator like Cardhub’s. It will tell you, for instance, that if you have average credit card debt of $7,000 and are paying the average rate of 14%, you would save enough to pay off your debt two months faster if you transferred it to a zero-percent card with no fee.
Most bank’s websites also provide some suggestions. For example, the Citizens Bank Platinum MasterCard offers a zero-percent balance transfer for 15 months with no balance transfer or annual fees.
If you are a saver looking for higher yields, life is not about to get rosier in 2015.
“Rates are brutal,” says Morgan Quinn, feature writer for GoBankingRates.com. The yield on the typical savings account is less than 1%.
Good news in this category amounts to rates tipping over 1% on some CDs and savings accounts with high balances.
Interest rates on savings accounts probably will not head toward 3% until 2020, according to GoBankingRates latest report.
In the meantime, the highest rate Quinn was able to find was 1.4% at EverBank for “yield-pledge” checking with a $1,500 minimum opening deposit and an ongoing balance of between $50,000 and $100,000.
The benchmark 10-year U.S. Treasury yield fell to 1.89% on Monday, its lowest since May 2013.
If interest rates go up, “it will be a tough year for bond investors,” Bankrate’s McBride says.
You can mitigate this risk with individual bonds by simply holding them to maturity, he says. But if you invest in bond funds, either directly or through target-date or managed funds in your retirement accounts, the value will probably decline.
That is not all bad news if you just stay the course. McBride’s advice: “Buckle your seat belt and hold on.”