The Federal Reserve raised its target federal funds rate for the eighth time in a row on Wednesday in an ongoing effort to curb persistent inflation.
At a recent meeting, central banks approved a more modest 0.25 percentage point hike following recent signs that inflationary pressures have begun to ease.
Greg McBride, chief financial analyst at Bankrate.com, said: “The easing of inflationary pressures is clear, but that doesn’t mean the Federal Reserve’s job is done.”2 We still have a long way to go to reach 10% inflation.”
What the Federal Fund Rate Means to You
The Federal Funds Rate, set by the US Central Bank, is the rate at which banks borrow and lend to each other overnight. It’s not the rate consumers pay, but the Federal Reserve’s moves still affect the borrowing and saving rates they see every day.
This rate hike corresponds to a rise in the prime rate, which immediately raises the cost of financing various forms of consumer borrowing, putting further pressure on already financially distressed households.
“Inflation shredded household budgets, and in many cases, households were forced to rely on credit cards to bridge the gap,” McBride said.
On the flip side, “with interest rates still rising and inflation now low, it’s the best of both worlds for savers,” he added.
How Higher Interest Rates Affect Your Money
1. Your credit card rate will go up
Since most credit cards have variable interest rates, they are directly related to the Fed’s benchmarks. When the Federal Funds Rate goes up, so does the Prime Rate, and credit card rates go up within one or two billing cycles.
“Credit card rates are already at their highest in decades,” said Matt Schultz, chief credit analyst at LendingTree. Credit card APRs are almost certain to continue rising for at least the next few months, so it’s important that cardholders continue to focus on reducing their debt.”
Credit card annual interest rates have averaged close to 20%, up from 16.3% a year ago, according to Bankrate. At the same time, more and more cardholders are in debt each month and paying very high interest rates. “It’s a bad combination,” he says McBride.
More than 19%, if you make a minimum payment on your average credit card balance ($5,474 according to TransUnion), it will take you about 17 years to pay off your debt, and at least $7,528 in interest, your Bankrate has calculated
According to another analysis by WalletHub, this rate hike will cost credit card users at least $1.6 billion in additional interest in 2023.
“A 0% transfer credit card is one of the best weapons Americans have in the fight against credit card debt,” advises Schulz.
Otherwise, consolidate your high-interest credit cards to pay off your low-interest personal loans. “Interest rates on new personal loan offers have also increased recently, but if you have credit, you may be able to find options that feature lower interest rates than current credit card rates.”
2. Mortgage rates continue to rise
Interest rates on 15- and 30-year mortgages are fixed and tied to government bond yields and the economy. LendingTree’s senior economist Jacob Chanel said those rates are starting to come down as economic growth slows, but they’re still at their highest level in a decade.
The average interest rate for a 30-year fixed-rate mortgage is now around 6.4%, up almost 3 percentage points from 3.55% a year ago.
“Relatively high interest rates, coupled with persistently high house prices, mean that buying a home is still difficult for many,” Mr Channell said.
The rate hike increased the cost of new mortgages by about 10 basis points. Assuming an average mortgage for him of $401,300, this equates to about $9,360 over the full term of the loan over a 30-year period, WalletHub found.
“Even if the housing market has gotten a little cheaper recently, the housing market is still far from becoming truly affordable,” Channel said.
Other mortgages are more closely tied to Fed action. Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are pegged to the prime rate. Most ARMs calibrate once a year, HELOCs calibrate immediately. Already, the average HELOC rate has increased from 4.11% a year ago to 7.65%.
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3. Auto loans get expensive
Auto loans are fixed, but the payments are getting bigger because the price of all cars is going up and interest rates on new loans are going up.
The average five-year new car loan interest rate is now 6.18%, up from 3.96% last year.
The Federal Reserve’s latest move could push average interest rates even higher, but consumers with higher credit scores are more likely to secure better loan terms or turn to used car models. you can make better deals.
According to Edmunds data, paying an annual rate of 6% instead of 4% would cost consumers $40,000 more, or $2,672 more in interest on a 72-month auto loan.
Ivan Drury, Director of Insights at Edmunds, said:
4. Some student loans will be more expensive
Interest rates on federal student loans are also fixed, so most borrowers won’t be affected immediately by an interest rate hike. But if you’re looking to borrow money for college, interest rates on federal student loans for 2022-23 have already risen to 4.99% from 3.73% last year, and loans paid after July 1 will be likely to be even. taller than.
If you have private loans, those loans may have fixed interest rates or variable interest rates linked to Libor, Prime or T-bill rates. It depends on the benchmark.
According to Bankrate, the average private student loan currently has fixed interest rates ranging from just under 4% to almost 15%. Much like car loans, they vary greatly based on your credit score.
For now, anyone with existing federal education debt can benefit from 0% interest until the suspension of payments ends.
What depositors need to know about rising interest rates
The good news is that interest rates on savings accounts are finally higher after the recent string of rate hikes.
The Federal Reserve does not directly affect deposit rates, but they tend to correlate with changes in the target federal funds rate. , which has now risen to an average of 0.33%.
Thanks in part to reduced overheads, the highest yielding online savings account has a high interest rate of 4.35%, well above the average rate of traditional brick-and-mortar banks.
According to DepositAccounts.com, the interest rate for online banks’ one-year certificates of deposit is even higher, currently around 4.75%.
As central banks continue their rate hike cycle, these yields will continue to rise as well. However, according to his Yiming Ma, assistant professor at his School of Business at Columbia University, you’ll have to do some research to make use of them.
“If you haven’t already, it’s very important that you benefit from a high-interest environment by getting higher returns,” she said.
Still, the current rate of inflation is higher than all these rates, so money in savings loses purchasing power over time.
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