Thanks Janet Yellen: Fed Rate Hike Helps More Than Hurts Americans

Americans will earn more money on their savings than they'll pay through higher interest rates on credit cards and home lines of credit after the Federal Reserve’s latest rate hike, according to an analysis from ValuePenguin. In all, we estimate consumers will be ahead by more than $800 million this year.

If that conclusion surprises, it’s probably because when the central bank raises the benchmark Federal Funds Rate—as it did on June 14 by a quarter-point—attention tends to focus on interest-rate increases on debt, including credit-card balances. Yet our analysis reveals that those debt charges will be more than offset by the additional interest consumers will earn on their savings accounts after the hike.

Overall, U.S. consumers will pay $1.68 billion more annually in interest payments on their credit cards and home-equity lines of credit, or HELOCs, because of the latest rate increase. But we estimate they'll also earn $2.49 billion in interest on savings and money market accounts. That will result in a net gain of $805.9 million, or $6.53 per household.

While the aggregate figures are impressive, the advantage for each household is admittedly modest. American households will pay $10.22 more in interest on their credit card debt this year, plus $3.43 more on HELOC interest (if they have one). They will earn $20.18 more in interest on money in their savings and money market accounts.

The gains are not evenly distributed across the country. States’ gains vary widely, due to differing balances of debt and savings. The average Hawaiian household will get $14.21 ($6.9 million total) this year when interest on their debt is subtracted from interest earned on savings accounts. That’s more than double the national average. Households in New Jersey fare second-best, pocketing $11.66 ($38.4 million in total) this year. Those are the only two states to post double-digit, per-household net gains.

By contrast, Oklahomans get the least out of the Fed rate hike. Households in the state gain only $2.77 each ($1.5 million total) this year after deducting debt interest payments from earned interest. Other states with the least gains per household include Vermont ($3.29 per household, Maine ($3.30 per household) and Arizona ($3.40 per household).

We focused on so-called revolving debt, from credit cards and home-equity lines of credit, because rates on those debts are affected almost immediately by the Fed Funds Rate. We excluded other types of debt, including installment loans such as mortgages and auto loans, because the Fed’s effect on those rates tends to be less immediate or direct. (For more detail, see our Methodology.)

How Much States Will Gain From The Rate Hike

Here are our calculations of the net gain consumers in every state will receive from the June 14 rise in the Federal Funds Rate. These figures, per-state and per-household, reflect our estimates of how much the interest consumers earn on savings will exceed the higher interest payments they'll pay on their revolving debts.


Credit Card and HELOC Debt

Using estimates from Nielsen Demographic Data on the total credit card and HELOC (home-equity line of credit) debt by state, we multiplied the average household balance by the number of households who utilize that specific form of debt. We excluded households that don’t carry a balance on their card or HELOC from month-to-month, since they are not directly affected by a change in interest rates. We estimated current annual interest charges by multiplying the total debt by the average annual percentage rate (APR) for each product, and in each state. Since hikes in the Fed rate are passed along to consumers directly, we then repeated this process using an interest rate that was 0.25 points higher, and calculated the difference.

To control for differing state populations, we looked at per-capita increases in interest charged and earned in each state. We did this by dividing the net difference in interest by the number of households in each state, according to Nielsen data.

Savings Account Interest

Again using data from Nielsen Demographic Data, we obtained numbers for the average amount deposited in liquid savings accounts in each state as well as the number of households that held such accounts. Multiplying the average savings amount by the number of households yielded the total amount that was held savings deposits in each state.

We then approximated the interest earned on that money by multiplying the total deposits by the average savings-account rate in each state. We then added 30% of the 0.25 point rate hike to the average rates. This was based on an S&P Global Market Intelligence estimate that banks typically pass on about 30% of any interest rate increase to their customers, a figure known as the "deposit beta." Multiplying total savings deposits by the new (higher) interest rate allowed us to calculate the expected consumer gains from the hike through higher savings-account interest.

As with consumer debt in credit cards and HELOCs, we controlled for differing state populations by dividing the difference in each state by the number of households.

Mortgages and Student Loans Are Excluded

We did not account for mortgage debt in our estimate of the rate hike’s impact on consumer finances. Although mortgage rates are sensitive to changes in Fed rate policy, such changes often take a long time to affect the actual rates on mortgages, and thus any impact on interest charges. Most lenders have anticipated the coming rate hike and adjusted their rates on new mortgages accordingly. Moreover, most mortgages carry fixed rates lasting 15 to 30 years, which insulates a majority of homeowners from the effect of rising interest rates.

Even among consumers with adjustable rate mortgages (ARMs), only a portion of borrowers actually experience changes in interest rate. Most ARMs allow for a multi-year period in which the mortgage rate is locked, and rate adjustments—when they do occur—take place at preset yearly intervals, delaying the effect of a rate hike.

Student loans were also excluded because our data did not account for the differences between federal and private loans. Private variable-rate loans constitute a small portion of overall student loan debt, while most student loans are part of federal programs that guarantee a permanent fixed rate. Private loans make up a small fraction of the market — under 8% in 2014.

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