If you’re not sure how to build credit, you’re not alone. The Consumer Financial Protection Bureau (CFPB) reports that approximately 1 in 10 American adults lack a credit record; that’s 26 million people. Another 19 million Americans have a credit record but no credit score because their credit history is either out of date or too thin to show up on a credit report. 

If you’re starting from scratch, figuring out how to build credit doesn’t have to be complicated. Here are some simple credit-building steps you can take to get started.

In this article, we’ll cover:

• How to build credit with credit cards
• How to build credit without credit cards
• How to monitor your progress

Build credit with a credit card

Opening a credit card can be one of the fastest ways to build credit if you use your card wisely. But how can you get approved if you have little to no credit history? There are a few options to make it more accessible:

• Get added as an authorized user: A family member or significant other can add you as a user on their credit card; that card’s payment history will then be added to your credit report
• Open a student credit card: Many financial institutions offer this type of card for college students
• Open a secured credit card: This type of credit card is backed by a cash deposit you make upfront 

If you’re not a college student and it’s not practical for you to become an authorized user on a family member’s card, that’s okay. Those solutions aren’t available to everyone. So let’s focus on building credit with a secured credit card.

Get a secured credit card

A secured credit card functions like a standard unsecured credit card, with one major difference:  you deposit cash when you open the card, which serves as collateral if you’re unable to make your payments. Generally, your secured card’s credit limit will be equal to the amount of your deposit. A secured credit card is not the same as a debit card; any money you charge to your card is a debt you have to pay back, and you’ll have to pay interest on any balance you don’t pay off each month.

Because the card issuer shares information about your credit usage with credit reporting agencies, regular responsible usage can help build up your credit history. Visa, Mastercard, and nearly all of the leading credit card lenders offer a secured card option. You can also inquire at your bank or credit union about applying for a secured credit card.

Keep your card balance low

Your card’s credit limit is the maximum balance you can have at any given time, but just because you can borrow up to the limit doesn’t mean it’s a good idea. One factor that credit agencies use to calculate your credit score is credit utilization. That’s the amount of credit you have available compared to your balance. Generally speaking, using more than 30% of your available credit at one time can hurt your credit score. For example, if your credit limit is $1,000, keeping your balance below $300 is a good guideline.

Another important reason to keep your balance low is to avoid spending money on interest or running up debt you can’t pay off without squeezing your budget. Think of your credit card as a convenient way to pay for everyday things you know you can pay off within your billing cycle, not a long-term loan. 

Best practices for keeping your card balance low:

• Keep your credit utilization at 30% or less
• Make more than one payment per billing cycle
• Don’t use your card to buy more than you can afford to pay off every month  
• If you can’t pay your full balance each month, at least pay more than the minimum

Set up automatic monthly payments

Payment history makes up about 35% of your credit score, so delinquent payments can quickly turn your efforts to build credit into creating bad credit. Additionally, late credit card payments are often subject to fees or penalties, so you’ll end up owing even more the next month.  

Setting up automatic monthly payments ensures you won’t miss the crucial deadline. Most cards give you several options for autopay, such as the minimum balance, a fixed amount, or the entire credit card balance each month. 

Request a credit limit increase

Increasing your credit limit without increasing your spending lowers your credit utilization ratio, which could benefit your credit score. After you’ve established a track record of on-time payments, your credit card company may be willing to increase your credit limit. If you have a secured card, you might have to add additional funds to your security deposit, but not always. In some cases, the institution might even automatically increase your credit limit after a certain period of time. Since credit utilization is an important part of developing a good credit score, it’s worth calling your institution to ask about your options. 

Open a second credit card

Once you’ve been using your secured credit card responsibly for about a year, you may be eligible to upgrade to an unsecured card. With your credit history established, there might be many more options for cards you could qualify for, so shop around to find the right one for you. Consider factors like the interest rate and whether the card has an annual fee. Some credit cards even offer added benefits like points or cash back that might interest you.

When you open a new credit card, it may be wise to stop using your first card so you don’t have to keep track of balances and bills for multiple credit cards each month. But don’t close that account. Credit reporting bureaus look at the age of your accounts when calculating your credit score; the longer an account has remained open and in good standing, the more it works in your favor. Essentially, older credit accounts give more credence to your credit history than new credit.    

Build credit without a credit card

Responsible use of a credit card is one of the best ways to establish your credit history, but it’s not the only path. It’s possible to build new credit without a credit card through a credit builder loan or by leveraging your rent and utility payments.

Apply for a credit builder loan

A credit builder loan (CBL) is a type of personal loan made specifically to help borrowers build credit history and improve their credit scores. Here’s how it works: Instead of the bank loaning you a lump sum that you repay over time like a standard loan, your lender will hold the loaned money in a secured savings account until the loan is repaid. You make fixed monthly payments and then get the principal back at the end of the loan term. 

Research shows that opening a CBL can increase your likelihood of establishing a favorable credit score by 24% and increase existing credit scores by 60 points or more, depending on your individual financial situation. While CBLs are not as common as other types of loans, you may be able to establish one with your bank or credit union.

Keep in mind that, just like with credit cards, making your payments on time is crucial; late payments reflect poorly on your credit score. And you’ll likely pay interest on the money you borrow, though some institutions will credit you back some of the interest after you’ve paid off the loan.

Leverage your rent and utility payments

If you pay your rent and utilities on time every month, you might be able to use your good payment history to build credit. These kinds of payments aren’t automatically shared with credit reporting agencies, but all three major credit bureaus, Equifax, Experian, and TransUnion, will include rent and utility payment information in credit reports if they receive it. 

You can’t report your payments to the bureaus yourself, and landlords and utility companies often won’t do so on your behalf because they have to pay a fee. The good news is that there are many rent-reporting services that will verify and report your payments. 

The options offered by these services and the fees they charge vary, so comparison shop to find the right one for you. Some just report rent, while others will also include various types of utilities. Some will also report your past payments, which can be a benefit if you’ve always paid on time. You’ll also want to find out which bureaus the service reports to, as not all of them include all three agencies. 

If you use a rent-reporting service to help build credit, remember that consistent on-time payments are essential if you want a positive impact on your credit score. 

Take your time and watch your numbers climb

Building credit takes patience and diligence; after all, it’s called credit history for a reason. It can take six months or more to generate your first credit score after you get started with a credit card or CBL loan. Having only that new credit won’t necessarily get you to a high credit score; keeping accounts in good standing over a longer period of time, maintaining a low credit utilization ratio, and making all your payments on time are key to increasing your score over time.

As you put your plan for how to build credit into action, keep an eye on how your credit score is affected. You can get a free credit report once a year from all three of the major credit reporting bureaus; check it to see your progress and make sure no issues bringing your credit score down. If you want to keep an even closer eye on your progress, a free credit score app will give you a more frequent look at your credit report, and many offer personalized tips for improving your credit score. And remember: building credit is just one piece of the puzzle. Your budget, savings, and investments are also core components of working toward a brighter financial future.     

The post How to Build Credit: Why You Need It and How to Get It appeared first on Stash Learn.

Update, Tuesday, October 30, 2019: The  Fed cut the federal funds rate by a quarter of a percentage point again, due to weakening business investment and exports, and concerns about the global economy, it said in a statement. The Fed’s benchmark rate is now between 1.5% and 1.75%. The current rate cut is the third this year. The Fed also said that consumer spending remains strong and inflation is low, keeping the economy resilient for now, according to reports. Find out more about rate cuts in the story below.

Update: On Wednesday, September 18, 2019, the Federal Reserve cut its benchmark interest rate again by a quarter of a percentage point, citing the uncertainty of global economies and low inflation in the U.S. The federal funds rate is now between 1.75% and 2%. Read our story from July for an explanation of what the federal funds rate is, why the Fed is cutting interest rates, and what it means for the interest rates you pay on loans.

On Wednesday, July 31, 2019, the Fed cut its benchmark interest rate for the first time in more than a decade.

By cutting something called the federal funds rate, the Fed said it was helping to keep the economy growing, according to a statement.  The Fed may also be trying to head off the possibility of a recession in coming months as global economic growth slows and the impact of the trade war is felt more, according to reports.

Here are more details:

• The Fed, the nation’s central bank, cut something called the federal funds rate by 0.25%, or a quarter of one percent.
• The federal funds rate is now at a rate between 2% and 2.25%.
• The rate cut was not a surprise. The central bank set the stage for its current move during its last meeting in June, when it chose not to increase interest rates.
• This is only the fifth time in 25 Years that the Fed has cut rates.

Read our related coverage here.

Why cut interest rates now?

The Fed tends to cut interest rates when the economy is weak. But by all accounts, the U.S. economy is still going strong. Unemployment is at a 50-year low, inflation remains below 2%, and consumer spending is healthy.

However, there has been a slowdown in manufacturing, and concerns continue about the unresolved trade dispute with China, which could decrease economic growth domestically and globally, according to reports.

Also, while the central bank is supposed to operate independently from politics, President Trump has pressured the Fed to lower interest rates, saying the rate increases over the past few years have slowed economic growth.

It raised rates four times in 2018. The last time the Fed raised rates was in December 2018.

What does cutting interest rates do?

Cutting interest rates often lowers the cost of borrowing, which might make it more appealing for consumers and businesses to take out loans, and to buy more things, which could stimulate the economy.

Cutting interest rates could also lower the interest rates that consumers receive on savings accounts, or other interest-bearing accounts.

The last time the Fed cut interest rates was in 2008, at the height of the recession. At that time, the central bank reduced interest rates to 0% for a time to stimulate the economy. Low-interest rates helped the economy recover over time.

What does the Fed do again?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system, and the economy. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds and the interest on savings accounts.

The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.

Since 2015, the Fed has increased interest rates nine times.

The post What’s Behind the Fed’s Recent Rate Cut? appeared first on Stash Learn.

The nation’s central bank, known as the Fed, sets a key interest rate that determines interest rates that consumers pay on everything from credit cards to car loans, as well as the interest paid on bank accounts, among other things.

By leaving interest rates where they are, the Fed is reversing a policy of rate increases that it followed throughout 2018. It cited low inflation and strong employment as reasons for staying the course, but also noted consumer spending is slowing.

Here’s a short explainer on the Fed, and its role in the economy, and setting interest rates.

What does the Federal Reserve Do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.

The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.

It raised rates four times in 2018, and it’s current benchmark rates is between 2.25% and 2.50%. The last time the Fed raised rates was in December, 2018.

Although the central bank is supposed to operate independently from politics, President Trump has pushed back heavily against the increases, fearing they could affect the stock market. He recently suggested on Twitter that the Fed should slash interest rates, something the Fed did not think was necessary.

What does this mean for the stock market?

In December news of the interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.

When interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.

Markets dropped on Wednesday, because the Fed did not cut rates, according to CNBC.

Check out this message about the value of long-term investing (and avoiding market noise) from Stash’s CEO Brandon Krieg.

The post What’s Going on With the Federal Reserve and Interest Rates? appeared first on Stash Learn.

So what does that mean? We explain it.

Okay, so what happened?

The Federal Reserve said it would increase a benchmark interest rate called the federal funds rate to a level between 2.25% and 2.5%. The rate hike is likely to make some consumer borrowing costs go up, for example on auto loans, credit cards, and mortgages.

The Fed is the nation’s central bank, and it’s tasked with overseeing a stable economy.

Fed Chairman Jerome Powell suggested the central bank would continue increasing interest rates in 2019, though at a slower pace than it has in 2018.

Huh? What’s the federal funds rate?

The federal funds rate is a short-term rate that the Fed charges banks to borrow and lend money to one another. The federal funds rate, sometimes referred to as the overnight rate, forms the basis of other interest rates, such as for auto loans, credit cards, and mortgages.

Didn’t the Fed just raise rates?

Yup. The Fed has been slowly increasing the federal funds rate as economic growth has gathered steam. It has raised rates four times in 2018, and nine times since 2015.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the Great Recession. Officials hoped lower rates would prompt consumer spending and bank lending, among other things.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

What does this mean for the stock market?

News of the interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.

But when interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.

Nervous about all this volatility? Check out this message about the value of long-term investing (and avoiding the noise) from Stash’s CEO Brandon Krieg.

The post What’s Behind the Federal Reserve’s Rate Hike? appeared first on Stash Learn.

Other indexes are also near correction territory. The S&P 500, a grouping of 500 big company stocks, is down about 8%. And the technology-focused index called the Nasdaq entered a correction on October 11, 2018.

Indexes enter a bear market–a more serious occurrence—when they drop 20% or more, as happened in the months following the financial crisis in 2008 and 2009, when equities lost approximately half their value.

In and of themselves, corrections aren’t something for investors to panic about, according to experts.

In fact, 10% drops occur about once a year during normal times, Savita Subramanian, head of the United States Equity and Quantitative Strategy team at Bank of America Merrill Lynch told the New York Times earlier this year. Bear markets have occurred four times in the last five decades, according to reports.

What’s causing it?

Some of the factors causing indexes to fall recently are disappointing earnings for the third quarter from tech companies and others, a trade war with China, and fears about rising interest rates, among other things.

Businesses, investors, and financial experts fear that rising interest rates and inflation could have a negative impact on the economy and the stock market.

The post What’s a Market Correction? appeared first on Stash Learn.

Some 44 million people collectively owe $1.4 trillion in student loans. It’s not a pretty picture, particularly when you consider that the average borrower carries $37,000 in student debt, and will spend 20 years or more paying off their obligations.

Those are valuable years you could be saving for a home, retirement, or even your dream vacation.

Here are some strategies to consider, which could help you pay off your loans faster.

Lower your interest rate

Over the long term, a lower interest rate could be one of the most effective tools for paying off your student loans more quickly.

Federal student loans carry an average interest rate of about 4.5% for undergraduates and 6.3% for graduates, according to recent reports. While federal loans give you plenty of flexibility, including the ability to make deferrals on payments, and options for needs-based repayment, some private lenders can offer you lower repayment terms, that could potentially save you hundreds of dollars each year.

For example, let’s say you owe $30,000 and are paying 5% interest annually. That means your interest payments each year are $1,500. If you refinance your loans at 3%, you’d be paying $900 annually.¹

You could put that savings of $600 into an emergency fund, or you could invest it. Or you could use it to make extra loan payments, to pay it down even faster.

If you refinance with a private lender, read the terms of your new loan carefully. Some offer variable interest rates, which can increase over time as interest rates rise. Fixed rates on loans tend to be higher than variable rates, but they stay the same for the life of the loan.

Pay more than your minimum

You know to do this with your credit card balances, and the same holds true for your student loans. Paying the minimum owed can make your payments stretch on for more years than you want. And those could be key earning years, where you’ll probably want to save for your first house, your children’s education, or your own retirement.

We know paying more on a loan is often easier said than done, especially when every penny counts in your budget, and you may be struggling to put gas in your car or to pay for groceries.

But even if you can apply an additional $20 per month to your loans, that can make a big difference.

Here’s an example, from student loan corporation Sallie Mae, of how that can work:

• If you owe $10,000 and have an interest rate of 8% annually, it will take you ten years to pay off your loan, assuming minimum payments of $121.32 a month. You’ll make 119 payments, and wind up owing $14,557, with interest payments.
• If you bump up your monthly payment to $141.32 (just $20 more), you’ll pay of your loans in eight years, or two years earlier, and will save yourself close to $1,000 in interest payments.

Make extra payments

It’s often difficult to find extra money, but you may have it from working a second job, or at tax time, if you’re due a refund.

“If you can find a flexible part time job—Uber, Airbnb, and other similar jobs—you can take those earnings and apply them entirely to your student loan debt,” says Lou Haverty, a chartered financial analyst at Financial Analyst Insider.²

Unlike a mortgage, where there can be prepayment penalties, there is no penalty for paying off your student loan faster than scheduled. Extra payments can get you out of debt more quickly.

Loan forgiveness

Some federal student loans may eligible for public service loan forgiveness programs, after ten years of consecutive payments. However you must be working in a public service profession to qualify, which could include teaching in a low-income area, work in a public hospital, or in government. In some cases, such as teaching, there may be limits to how much debt could be forgiven.

Pay the highest interest rate student loans first

If you have multiple student loans with different interest rates, pay off the highest interest rate loans first. Getting rid of the highest interest debt first will save you money over time.

“Keep making minimum payments for all the loans as scheduled,” Haverty says. “But make regular additional payments to the highest interest rate loans each month.”

The post Top Strategies for Paying Off Student Loans appeared first on Stash Learn.

You may wonder what the bond market has to do with stocks, and why the two seem so interconnected.

When yields for bonds increase, it can make bonds appealing to investors. So investors may sell their stock holdings and purchase bonds, which are generally considered safer investments.

Confused? Read on, and we’ll explain.

What are bonds?

Something called the capital markets are where companies and governments go to raise money. The two key components of the capital markets are stocks, also known as equities, and bonds.

Whereas stocks are small shares of ownership that investors can buy and sell, bonds are a form of debt issued by a company or government.

Both stocks and bonds are used to finance operations for businesses and governments.

While stocks typically get all of the attention because they have the potential to earn large amounts of money, the bond market is actually much larger than the stock market, worth about $40 trillion in the U.S., according to research.

What do bonds do?

Bonds pay an interest rate, but they also have a price. The interest rate a bond pays is fixed, meaning it never changes. The price of a bond fluctuates, however, meaning it can rise and fall depending on what’s happening with interest rates and the economy.

Combined, a bond’s interest rate and price equal the bond’s yield, which is the return it pays an investor.

Here’s where it gets a little more complex. Typically, when interest rates increase, the price of existing bonds fall. Generally speaking, that’s because the interest rate for new bonds issued will be higher than those paid by existing bonds.

Prices for existing bonds with lower interest rates will tend to fall to make them more appealing to investors.

Today’s interest rate environment

Something called the Federal Reserve (the Fed), which is the central bank of the U.S., has been steadily increasing a key interest rate, called the federal funds rate, which underpins numerous other interest rates, including credit card rates, car loans, and mortgages.

The reasons for the increases are also complex, and they are rooted in the financial crisis that began in 2008. At that time, the Fed lowered its benchmark interest rate to 0% in response to the crisis, as way to help the economy recover. As the economy has strengthened, however, the Fed has begun increasing interest rates. In fact, it has raised interest rates four times since 2017.

As the Fed increases its benchmark interest rate, that’s caused a ripple effect with other interest rates, including in the bond market.

What’s a Treasury?

The U.S. government issues notes and bonds called Treasuries, which have varying lengths of time to maturity, ranging from months to 30 years.

The 10-year Treasury is considered the benchmark bond issued by the U.S. government, and its rate tends to be reflected in other interest rates. The federal government has issued trillions of dollars worth of 10-year Treasuries, which it uses to finance its operations. Treasuries are considered among the safest bond investments, because they are backed by U.S. government.

As the Fed has raised interest rates, the ripple effect has also hit Treasuries. In fact, this is the first time the 10-year Treasury yield has hit 3% since 2014, according to the Wall Street Journal.

So are rising yields on Treasuries good?

Increasing yields for the 10-year Treasury are, generally speaking, a sign of economic strength according to numerous experts.

So then why are higher bond yields sending the markets down?

Higher yields for Treasury bonds indicate that interest rates in the debt market, in general, are going up.

Just like interest rates on your credit card or mortgage, higher interest rates in the debt market suggest it will be more expensive for businesses to borrow. And businesses often need to borrow to fund their operations, and to grow.

But higher borrowing costs can hamper corporate earnings, and even just the anticipation of that can send equity markets down.

The post Bond Market vs. Stock Market: How Are They Connected? appeared first on Stash Learn.

Markets are reacting to the unexpected news of a potential trade war with China. It’s true that we are in uncharted waters. While Americans have lived through trade wars and tariffs in the past, President Trump cites national security and protecting intellectual property–American innovation and technology–as reasons for the tariffs.

Here’s the thing:

For first-time investors, seeing the market suddenly start going up and down like a roller coaster can be nerve wracking. Here’s our advice:

Turn on Recurring Transactions and keep on adding small amounts into your investments on a regular basis. That’s called dollar-cost averaging, and it’s really important. When you use dollar-cost averaging, you buy more shares on the dips, and fewer on the market highs, which will reduce the average cost you pay for shares over time.

While times may seem strange, market volatility is normal.

We’ve been in a tremendous bull market for a number of years now. Our economy is in solid shape — so solid in fact that the Fed has continued to raise interest rates. Markets have been trading at all-time highs.

Don’t think about the daily or weekly or monthly volatility. Think about the long term and the remember, the markets do go up and down.

If you take a longterm view, markets do go up. On average, if you look at the last 100 years, markets increase slightly more than 8% a year. Going forward, many experts predict a long-term expected annual return for US large cap stocks (i.e., the S&P 500) of 5.9%.”

That said, there are some years where the market is strong and some years where things are pretty bad. This is why you’ve just got to take that long term view when you’re thinking about investing.

So we may be entering a trade war. What can you do?

There are two approaches that we always think about. The first one is you can always move to less volatile investments. If you’re anxious, add bonds to your portfolio. They’re good long-term investments that can help dampen the fluctuations in your returns.

The other option that you have is to ride through the downturn and, if you’ve got little bits of money, periodically add little bits more over time, because you’re effectively dollar-cost averaging, as I’ve said above.

What is a trade war?

You can read our longer piece here. But in short, a trade war is when countries engage in a tit-for-tat over tariffs. In response to U.S. tariffs on Chinese goods and services, China could impose tariffs of its own on U.S. steel, as well as other exports.

The tariffs could also increase costs for U.S. consumers, and reduce demand for U.S. exports, which could dent our economy, according to experts.

How might tariffs increase costs at home?

Think of it this way: just about every manufacturer in the U.S. depends on steel, and costs for steel are about to go up. Businesses that use steel, or sell steel products, are likely to make up for the price increases by passing the higher costs along to consumers.

Over the last 20 years, the U.S. has entered into numerous trade treaties, the most famous of which is perhaps the North American Free Trade Agreement (NAFTA). These treaties, which are complex multilateral agreements that favor negotiations between all countries that sign, have reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.

Trump has argued such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete.

In 2017, the U.S. signed a less comprehensive trade treaty with China, but Trump has said recently that products from China have cost the U.S. 6 million jobs, and have caused 60,000 factories to close. Economists reportedly dispute these figures.

Zoom out and look at the big picture.

Don’t think about the daily or weekly or monthly volatility. Think about the long term.

We have a saying at Stash. It’s all about “time in market, not trying to time the market.”

Selling effectively basically locks in any gain or loss you’ve made, but it sets your losses in stone.

Stay strong. Stay the course. Stay diversified. We’re in this with you.

The post How to Keep Stashing Through Storms (and Trade Wars) appeared first on Stash Learn.

On Wednesday, the Federal Reserve announced it will increase its benchmark interest rate to between 1.5% and 1.75%, and suggested rates would go up at least two more times in 2018.

This is the fourth time the Fed–which is the central bank of the U.S.–has raised interest rates since 2017, and it’s the sixth time since the financial crisis, which began in 2008. The move was widely expected, according to reports, and it further signals the confidence the central bank has in the economy

“The labor market has continued to strengthen and that economic activity has been rising at a moderate rate,” the Fed said in a statement on Wednesday. “Job gains have been strong in recent months, and the unemployment rate has stayed low.”

Newly appointed chairman of the Fed, Jerome Powell, announced the news in his first meeting with other central bankers. Powell was appointed in October to replace former chair Janet Yellen.

How does the Fed increase interest rates?

The central bank is increasing a rate called the federal funds rates, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages.

The Fed has been slowly increasing the federal funds rate for the last two years as economic growth has gathered steam. In December, it raised this rate to between 1.25% and 1.5%. In June, it raised this rate to between 1.0 and 1.25%.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession. Officials hoped lower rates would prompt consumer spending and bank lending, among other things.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

The federal funds rate is sometimes referred to as the overnight rate, because banks conduct the lending and borrowing after daytime business hours.

Increasing interest rates and credit cards

A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things.

And if you’re carrying a credit card balance, the increase in interest rates could be of particular concern. That’s because credit cards have something called a variable rate. A variable rate changes to reflect increases and decreases in interest rates. (That’s in contrast to a fixed interest rate, which as its name implies, stays the same no matter what.)

If you’re carrying a credit card balance, now might be the time to consider paying it off, or reducing it significantly if you can.

“Variable rate debt is where you are most susceptible as interest rates rise,” Bankrate analyst Greg McBride recently told CNBC.

Credit card debt is at a record high in the U.S., totalling more than $1 trillion in 2017.

Although most mortgage rates are fixed, some mortgages carry variable rates as well. These are called adjustable rate mortgages, or ARMs, and rates on these mortgages also rise when interest rates increase, making it more expensive for homeowners.

Higher interest rates aren’t always a bad thing, however: They can also lead to increased rates for bank savings accounts, for example.

“Job gains have been strong in recent months, and the unemployment rate has stayed low.”

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The post Why Does the Fed Keep Hiking Interest Rates? appeared first on Stash Learn.

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Has your grandfather ever told you that back in his day, you could buy a whole shopping cart of groceries for $10? Or that a movie ticket used to cost a quarter?

He’s talking about inflation. In short, your money doesn’t buy as much as it used to. How does this happen? Well, that’s where it gets a little more complex. Luckily, we have Jeremy Quittner, Stash’s financial writer, to explain it all to us.

We tackle inflation, interest rates, and how it all affects the economy.

Thanks for listening to Teach Me How to Money. Send us your questions at teachmehowtomoney@stash.com, and we’ll try to answer the on a future episode. 

Ready to start investing? Sign up for Stash and then enter the promo code PODCAST and you’ll get $5 to get started on your financial journey.

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Something called the Consumer Price-Index (CPI)–which gauges price increases for a host of items including cars, clothing, gas, even breakfast cereal–rose 0.5% in the month .

So what does the CPI have to do with you? We explain it.

What’s the CPI?

The Bureau of Labor Statistics (BLS), which is a division of the Department of Labor, compiles a monthly report about prices, called the Consumer Price Index, or CPI. While it looks at price changes throughout the country, it focuses primarily on changes in densely populated urban areas.

At its most basic level, the CPI measures inflation, which is an increase in the cost of goods and services. (Another measure the BLS uses is something called the Producer Price Index, which calculates the cost to industries to produce their goods and services.)

The CPI examines prices for a basket of goods including thousands of items in various geographies, including milk and coffee, rental and housing prices, televisions and toys.

Here are the categories:

• FOOD AND BEVERAGES: Breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks.
• HOUSING: Rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture.
• APPAREL: Men’s shirts and sweaters, women’s dresses, jewelry.
• TRANSPORTATION: New vehicles, airline fares, gasoline, motor vehicle insurance.
• MEDICAL CARE: Prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services.
• RECREATION: Televisions, toys, pets and pet products, sports equipment, admissions.
• EDUCATION AND COMMUNICATION: College tuition, postage, telephone services, computer software and accessories.
• OTHER GOODS AND SERVICES: Tobacco and smoking products, haircuts and other personal services, funeral expenses.

So what exactly happened?

The CPI increased in January for a broad category of goods and services. Some notable increases include energy, which jumped 3%; Clothing, which rose 1.7%; and medical care, which jumped 0.6%.

But some areas showed a decrease in prices, including natural gas services and electricity, which fell 2.6% and 0.2%, respectively, according to the BLS.

Why do people freak out about interest rates?

It’s complicated, but think of the economy as an interconnected ecosystem. When conditions change for one indicator, it’s like they’ll change for others. Last week, market indexes fell into correction territory, in part because of fear that inflation is on the rise.

Investors tend to worry about inflation, because it can mean that interest rates will also go up in response. Here’s why: Something called the Federal Reserve, which is the nation’s central bank, sets monetary policy–which includes how much money is flowing into the economy through the banking system. One way it controls the money supply is by adjusting a key underlying interest rate, called the federal funds rate, which affects the cost of borrowing money between banks.

Think of the economy as an interconnected ecosystem. When conditions change for one indicator, it’s like they’ll change for others.

That interest rate underlies many other interest rates that affect consumers, including mortgages, credit cards, and car loans. And the Fed raises it to decrease the money supply, and lowers it when it want to increase the money supply.

What impact does inflation have on the economy?

In 2008, as the financial crisis began in the U.S., the Fed lowered its interest rate to near zero percent. It did that to increase the flow of cash in the economy, and to spur borrowing and spending by consumers.

Over the past couple of years, however, as the economy has recovered, the Fed has raised its benchmark interest rate, aiming to get back to more normal levels, typically between 2% and 5%. The federal funds rate is currently between 1.25% and 1.5%.

But the Fed also bolsters interest rates when it fears the economy may be going into overdrive, and growing too quickly. One indicator that it looks at is inflation. And it has set as its goal for inflation at about 2%. If there are signs inflation will go much above that, the Fed is likely to raise interest rates to apply the breaks on the economy.

The Fed is likely to increase interest rates again in 2018, to get back to normal rates and to combat signs of inflation, experts say.

“The worry of the markets is not that inflation is becoming a big problem, … it is that the Fed is now forced to play catch up” by increasing interest rates, Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC on Wednesday.

How do higher interest rates affect the market?

Higher interest rates can increase the cost of borrowing for businesses, and that can eat into earnings for businesses, including public companies whose stock consumers may own. That in turn can cause stock prices to fall.

Higher interest rates can also increase the appeal of bonds, which pay a fixed percentage of interest to investors. As rates go up, the yield on many types of bonds also increases. The yield, or percentage of interest paid, on the 10-year U.S. Treasury–one of the benchmark bonds offered by the U.S. government–rose to 2.89% on Monday, according to Bloomberg.

That’s an increase of nearly 0.5% since the beginning of 2018.

Jargon hack! Seasonally adjusted vs. unadjusted prices

Now that you know the basics of the CPI, here’s something else to think about. The CPI also shows statistics for seasonally adjusted and unadjusted data.

Here’s what that means.

Different seasons can show spikes in economic activity. Think of all the things you do in the summer: you may go on vacation with your family or loved one, for example, and might visit a resort or some other travel hot spot, and spend some of your hard-earned cash.

And that amounts to increased economic activity in that region. But the summer ends, and the workers who staffed the boardwalk pizza stand or ride concession go back to school, and the stand closes for the season.

Similarly, the winter months can create a huge bump in oil consumption to heat houses and apartments. Or storms, like the recent hurricanes, can cause a temporary drop in economic activity. The seasonally adjusted data make allowances for those economic spikes and dips, and essentially smooth out the numbers.

While economists look at both figures, the seasonally adjusted numbers can give a better idea of economic trends, according to the BLS. (The 0.5% increase for January is seasonally adjusted.)

Economists also tend to focus on the core inflation number, which strips out energy and food–both considered to be volatile sectors of the economy. Core inflation rose 0.3% in January, which was the largest increase in a year, according to Reuters.

[infogram id=”697e2402-a543-4c4c-9f02-a9e1d15a9cf0″ prefix=”zCR” format=”interactive” title=”Consumer Price Index”]

12-month percentage change to CPI, as of January, 2018. Data is not seasonally adjusted.

Source: Bureau of Labor Statistics

So what does this all mean?

That 0.5% jump up in January may not seem like a lot. It’s just one month, after all. But it’s more than double the 0.2% increase recorded in December, 2017, according to the BLS.

For now, the DOL calculates the average annual rate of inflation to be about 2.1% for 12 months from January 2017 to January 2018.

We’re still a long way from runaway price increases, such as happened in the 1970s, when double digit inflation was common. But January’s increase has plenty of financial experts paying attention.

“Given the recent roller coaster ride in equities was sparked in good part by inflation fears accelerating rate hikes, the latest inflation data will be seen as increasingly important and telling, to date,” Lindsey M. Piegza, chief economist at Stifel Fixed Income, wrote in a research note, according to Reuters.

The post Inflation is Making a Come Back: What Does that Mean? appeared first on Stash Learn.

The Dow fell 666 points on Friday, which was its largest single-day decline since June, 2016, and the sixth-largest drop in the history of the index. Other indexes, including the S&P 500 and the Nasdaq followed, both dropping about 2% as well, according to reports.

It’s been a sudden turnaround for the stock market, which has risen to record highs over the last 12 months.

So what happened? We’ll explain:

Inflation, interest rates, and employment

Interest rates are rising

The Federal Reserve, the nation’s central bank responsible for setting monetary policy, has been increasing interest rates for the past few years. It did so in twice in 2017; And it’s expected to raise rates again in 2018.

Typically the Fed decreases rates when the economy is doing poorly, as a way to increase borrowing and spending, and it increases rates when the economy is doing well, as a way to apply the breaks when it’s afraid the economy may be overheating.

We’re on track for Gross Domestic Product (GDP) growth of about 5.4% in the first quarter, after years of growth closer to 3%. Too much GDP growth can spark fears of inflation, and with it the prospect of more rate increases.

Businesses, investors, and financial experts fear that both interest rates and inflation are on the rise, which can have a negative impact on the economy and the stock market.

Good to know: An interest rate is what’s charged on a loan, including mortgages, car loans, credit cards, and bonds. Inflation is an increase in the cost of goods and services that make up segments of the economy.

We’re approaching full employment.

It may seem strange, but Friday’s market drop occurred on the same day that the U.S. Department of Labor released positive news in its monthly jobs report. In January, employers added a healthy 200,000 new jobs, and the unemployment rate fell to 4.1%, its lowest rate in 17 years, according to reports.

While that’s great news for workers, The U.S. may be approaching what’s called full employment. In simplest terms, that means everyone who wants a job, or has been looking for one, has found one and is working.

Strong employment tends to push up wages–which have increased by about 2.9% in the past year, according to reports, which can spur consumer spending. And to cope with higher wages, businesses tend to raise their prices for the goods and services that consumers rely on every day, from gasoline for their cars, to toothbrushes and grocery items. All of this increases the risk of rising inflation.

Inflation has been running at levels of less than 2% annually, which is very modest.

But rising inflation can have a negative impact on markets.

Bonds are suddenly more attractive

Bonds, which are generally considered safer investments, are essentially IOUs from a company, city, or the federal government. As the Fed has steadily increased interest rates, the yields on bonds have gone up, too. For something called the 10-year Treasury, which is issued by the U.S. government, the yield has increased to 2.85%, which is half a percentage point higher than what it was a year ago.

Generally speaking, higher yields makes bond buying attractive for some investors, so more money is leaving the stock market for the bond market.

Higher bond rates also increase costs for businesses

Businesses, in particular large public companies, issue bonds to raise money to fund operations. Increasing interest rates can make it more expensive for them to borrow money.

Rising inflation can have a negative impact on markets.

Think of it like your credit card–when the interest rate goes up, it becomes more expensive to charge the things you want or need.

Higher borrowing costs can depress stock prices for public companies.

Is a market drop a bad thing?

Not necessarily.

The current bull market is one of the longest on record. Numerous financial experts and analysts have said the run up in stock prices, and stock indexes–before today, the S&P 500 was up nearly 18% for the year*–can’t be sustained.

And the sell-off could be a sign of things returning to normal, according to some experts.

The post What’s Causing Markets to Drop? appeared first on Stash Learn.

President Trump has named Jerome Powell as the next chairman of the nation’s central bank.

Pending Senate confirmation, he will replace Janet Yellen, the first woman to head the Federal Reserve, who was appointed by President Obama in 2014. Yellen’s term expires in early 2018.

By tapping Powell, Trump is breaking with tradition. Presidents usually allow their predecessor’s Fed chair picks to remain on the job for a second term. But Powell is reportedly considered a safe choice who is likely to continue on with his forerunner’s policies.

Jerome Powell will replace Janet Yellen, the first woman to head the Federal Reserve, who was appointed by President Obama in 2014

Who is Jerome Powell?

Powell, a Republican, has been a member of the Federal Reserve’s seven-member Board of Governors since 2012. He also served as an Undersecretary of the Treasury for George H.W. Bush, and was an attorney and investment banker in New York, according to his Federal Reserve profile.

He was a partner at the private equity firm Carlyle Group, where he reportedly amassed a personal fortune of up to $55 million. He has a reputation as a consensus builder who studies issues carefully before making decisions, according to the Washington Post.

Yellen has overseen interest rate increases as the economy has improved, and ended a bond repurchase program associated with the financial crisis.

Powell is considered a reasonable pick who won’t dramatically alter the course of the central bank. He is, however, considered by some to be more pro-business with regard to regulations than his predecessor.

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Federal Reserve’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting inflations rates, and lending money to the nation’s banks.

The central bank was responsible for making sure the financial system didn’t freeze up during the financial crisis that began in 2008. It flooded the banking system with cash, and decreased interest rates to below 0%. It also was responsible for a program called quantitative easing, where it bought up trillions of dollars worth of government bonds, which helped shored up the financial system.

The post Who is Jerome Powell? Meet Trump’s New Fed Chair Pick appeared first on Stash Learn.

And it seems everyone has an opinion.

Here’s a quick breakdown on why interest rates are an especially hot topic right now:

How Low Can You Go?

The Federal Reserve (better known as The Fed) sets interest rates “to help set the backdrop for promoting the conditions that achieve maximum sustainable employment, low and stable inflation, and moderate long-term interest rates.”

In 2008, the Fed made a number of financial decisions to ease the shock of the Great Recession, when the nation was hit with a banking and housing crisis. One of these ways was to lower interest rates to near zero.

This was seen as a way to jumpstart the wheezing economy by encouraging employment, economic growth and spending. The theory: Lowering the Fed’s key interest rate would keep people spending on the things that help make the American economy grow.

Lower interest rates would encourage Americans to start spending money again, thereby stimulating growth. Recession-scared people could obtain mortgages for new homes or construction or say, a new car at a lower rate.

Businesses would also benefit from lower interest rates. They would have incentive to buy equipment, hire more employees, remodel, and build new factories because they’d be able to borrow cheaply. In short, they could plan for the future.

The Fed kept interest rates at this low level for years, only incrementally raising them in 2015. Yellen surmised that the economy had recovered enough from the Great Recession to handle a gentle increase in interest rates.

Why raise interest rates?

Low interest rates sound pretty good! Cheap rates on mortgages and cars. What could be bad? Here’s the thing. Interest rates affect more than just the things we buy. They affect how much we save.

A low interest rate economy might be great for spenders but it makes life tough for savers. With low rates, people who hold variable interest rate debt (debt that can increase or decrease, such as an adjustable rate mortgage or interest on a credit card) have seen the value of their debt effectively decrease. But people who hold bond investments run the risk of negative investment returns when rates rise again.

The other problem with keeping interest rates artificially low: there’s nowhere to go from near-zero in the event we fall into another recession.

Keeping rates this low has been controversial. Some economists believe that allowing Americans to believe that this era of easy lending will never end creates a false economic reality—and could lead to another bubble.

What’s Happening Now

It isn’t a matter of if the Fed will raise interest rates. It’s how quickly.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both,” she told the Commonwealth Club of California in San Francisco back in January.

Policymakers are expected to raise the rate “a few times a year” through 2019, putting it near the long-term sustainable rate of 3 percent.

Increasing interest rates will affect those looking to buy homes or make large investments in their business as well as interest on credit cards. It will also affect banks and their ability to lend money

Tl;dr

Ultralow interest rates were put in place to prop up the American economy when it was struggling from the Great Recession. By easing interest rates back up, the hope is that Americans will start saving (and continue spending), that the U.S. dollar will strengthen and that employment will stay steady.

A slow raising of interest rates aren’t felt right away. Changes in monetary policy (which includes interest rates) can take up to 18 months for the economy to feel—and react.

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