How a 25 basis point Federal Reserve interest rate hike affects you

The federal funds rate, set by the US central bank, is the interest rate at which banks borrow and lend to each other overnight. Although this is not the rate consumers are paying, Fed decisions still affect the borrowing and savings rates they see every day.

This rise in rates will correspond to a rise in the prime rate and will immediately result in higher financing costs for many forms of consumer borrowing. On the other hand, higher interest rates also mean that savers will earn more money on their deposits.

Here’s a breakdown of how it works:

Credit card

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark index. As the federal funds rate increases, the prime rate also increases, and your credit card rate follows suit within a billing cycle or two.

Credit card annual percentage rates are now above 20%, on average, an all-time high. With most people feeling stressed about rising prices, more and more cardholders are going into debt month by month.

“Now people are going into debt and borrowing at high rates and that’s embarrassing,” said Tomas Philipson, a University of Chicago economist and former chairman of the White House Council of Economic Advisers.

With this rate increase, consumers in credit card debt will spend an additional $1.7 billion in interest, according to an analysis by WalletHub. Factoring in hikes between March 2022 and March 2023, credit card users will end up paying at least $31.7 billion in additional interest charges over the next 12 months, WalletHub found.

Home loans

Although 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone buying a new home has lost considerable purchasing power, in part due to inflation and political measures. from the Fed.

Rates are now off their recent high, but not by much. The average rate for a 30-year fixed-rate mortgage currently sits at 6.48%, according to Bankrate, down slightly from November’s high but still much higher than a year ago.

“This shows how difficult it is for many buyers to overcome today’s consistently high home prices and mortgage rates,” said Jacob Channel, senior economic analyst at LendingTree.

Other home loans are more closely tied to Fed actions. Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year after an initial fixed rate period. But a HELOC rate adjusts right away. Already, the average HELOC rate is 7.99%, according to Bankrate.

Car loans

Even though car loans are fixed, payments go up because the price of all cars goes up along with interest rates on new loans. So if you are planning to buy a car, you will be shelling out more in the months to come.

The average rate for a new car loan over 5 years is now 6.58%, according to Bankrate.

The Fed’s latest move could push the average interest rate even higher, just at a time when borrowers are already struggling to meet larger monthly repayments.

Student loans

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by rate increases. The interest rate on federal student loans taken out for the 2022-23 academic year has already increased to 4.99%, and any loans disbursed after July 1 will likely be even higher. Interest rates for the upcoming school year will be based on an auction of 10-year Treasury bills later this month.

For now, anyone with existing federal education debt will get 0% rates until the end of the payment pause, which the U.S. Department of Education plans to do sometime this month. year.

Private student loans tend to have a variable rate tied to Libor, prime or Treasury bill rates – and that means that as the Fed raises rates, those borrowers will also pay more interest. How much more, however, will vary with the reference.

Savings accounts and CDs

While the Fed has no direct influence on deposit rates, rates tend to correlate with changes in the target federal funds rate. Savings account rates at some of the largest retail banks, which have been at their lowest for years, are now averaging 0.39%.

Thanks in part to lower overheads, rates for the best-performing online savings accounts are up to 4.5%, far higher than the average rate at a traditional bank, according to Bankrate.

Rates on one-year certificates of deposit at online banks are closer to 5%, according to DepositAccounts.com.

With greater economic uncertainty ahead, consumers should take aggressive steps to secure their finances, including paying off high-interest debt and increasing savings, McBride advised.

“Grabbing a 0% credit card balance transfer offer or putting your emergency fund into a high-yield online savings account are good first steps.”

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