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Your Money

Understand Your Finances

What moves the rate on your mortgage, credit card and student loan?

The following article is part of Money Matters, a Chase series that unpacks economic and financial trends, and issues.

Make the most of your money.

Interest rates are edging up. Everything from new mortgages to auto loans are costing people more than they did two years ago. So, what's driving the rate increases, and how will they impact your wallet? Some rates change quickly and some much more slowly.

Credit cards. The variable rate you pay is almost always tied to prime rate that's published in The Wall Street Journal, in addition to a fixed percentage. The rate on your credit card can change monthly.

The Journal gets its rate by polling big banks on their prime rate, and they generally change their rate when the Federal Reserve changes its federal funds rate. Eight times a year, 12 bankers at the Federal Reserve meet as the Federal Open Market Committee to review the federal funds rate.

The Committee tries to keep inflation in check while maximizing US employment, which can be tricky. The prime rate has increased to 4.25 percent in four steps, from 3.25 percent in 2015.

Home equity lines of credit. Like credit cards, many of these lines are tied to the prime and can change monthly.

Business loans. Like credit cards, many of these lines are tied to the prime and can change monthly.

Fixed-rate mortgages. Your rate won't change if you already have a fixed-rate mortgage. If you are trying to get one, watch the rate on 10-year US Treasury notes. Many banks use that in setting the rate on mortgages that have a fixed rate for 20 or 30 years.

The 10-year rate is set by what investors are willing to accept when Treasury notes are sold at public auction. The rate isn't directly connected to the fed funds rate, but they usually move in the same direction.

A new 30-year fixed-rate mortgage averaged 4.01 percent in May 2017, compared to 3.85 percent in December 2015 But when even small change make a difference you're borrowing $200,000 or more for 30 years.

Adjustable-rate mortgages. Many of these are tied to Libor, which stands for the London Interbank Offering Rate. It's set by a committee of 16 international bankers each day and is generally a little higher than the federal funds rate. Many adjustable-rate mortgages start with have a fixed interest rate for a period of time, say five years, and then the rate can change periodically, usually annually.

Federal student loans. These are calculated each year using the rate on the 10-year Treasury notes each May and a complicated formula adopted by Congress in 2013. And the rate's different for undergraduate or graduate student borrowers.

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