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What a Fed rate hike means for you

Patrick Gillespie | 12/15/2015, 10:30 a.m.
America, get ready for higher rates.

— America, get ready for higher rates.

The Federal Reserve is widely expected to raise its key interest rate Wednesday for the first time in nearly a decade.

Millions of Americans will be affected as rates go up. If you have a credit card or savings account, invest in a 401(k) or in the markets, or want to buy a home or car, now's the time to pay attention.

The Fed slashed interest rates to zero in December 2008 to stimulate the economy and boost the housing market during the depths of the Great Recession.

A rate hike "will be a testament...to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession," Fed Chair Janet Yellen said in a recent speech.

Still, it won't be a game changer overnight. Rates are expected to go up at a slow, gradual pace.

Here's what you need to know about how the Fed's action will affect you.

1. Big ticket buyers: don't rush, rates are still low

If you're in the market for a home or a car, you don't need to rush and get it done tomorrow. But it's a good time to pay attention and start preparing to take the big decisions.

Interest rates are low but are slowly expected to start climbing next year.

The Fed determines the target rate for very short-term debt. But it also influences interest rates on credit cards, car loans and even long-term debt like mortgages.

None of the impact will happen overnight, experts say.

"Rates are pretty low and they're not going to change much," in the short term, says Dean Croushore, a University of Richmond professor and former Fed economist.

The Fed's first move is expected to be small. Right now the Fed has a target range of 0-0.25%. It's expected to go up to 0.25-0.50% -- or by 25 basis points. In the world of interest rates, that's very small.

The average interest rate on a typical 30-year fixed rate mortgage is 3.9% right now.

Ten years ago mortgage rates were near 6.3% and 20 years ago 7.2%, according to the St. Louis Fed. So yes, rates will likely be higher in a year but still low when compared to historical averages.

2. Savers see light at the end of the tunnel

Savers may not get to rejoice right away either, but there's hope for the future.

If you put money in your savings account or have certificates of deposit, you earned almost zero interest in the last seven years. That will begin to change over the next couple years, even if it's slow. Big banks won't start offering higher interest on savers' deposits immediately, experts say.

Still, the Fed's first rate hike will be a step in the right direction. It means there will likely be more increases in the near future (the next 1-2 years), and that eventually will mean higher interest income on your deposits. Bottom line for savers: it's good news, but you need to be patient.