Here’s what the Fed’s rate hike means for borrowers, savers

On Mar 16, 2022

The Federal Reserve raised its target federal funds rate by a quarter percentage point from near zero at the end of its two-day meeting Wednesday.

The first increase in the benchmark rate in three years will lay the groundwork for six more hikes by year’s end.

“The war in Eastern Europe gives the Fed reason to act more cautiously, but they will still be working to corral what is already the highest inflation in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com.

How the federal funds rate affects you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

“One single quarter-point rate hike from near zero levels will have a minimal impact on household finances,” McBride noted. However, this is just the beginning, he added.

“The cumulative effect of rate hikes is what is really going to have an impact on the economy and household budgets.”

Borrowing gets more expensive

Long-term fixed mortgage rates are already edging higher, since they are influenced by the economy and inflation.

The average 30-year fixed-rate home mortgage is now above 4%, and is likely to keep climbing, according to Jacob Channel, senior economic analyst at LendingTree.

A $300,000, 30-year, fixed-rate mortgage would cost you about $1,432 a month at a 4% rate. If you paid 4.5% instead, then the same loan would cost $131 a month more or another $1,572 each year, and $47,160 over the loan’s lifetime.

Many homeowners with adjustable rate mortgages or home equity lines of credit, which are pegged to the prime rate, will be more directly affected. Most ARMs adjust once a year, while a home equity line of credit, or HELOC, adjusts immediately.

Anyone with a variable-rate loan may want to refinance now into a fixed rate, said Mark Scribner, managing director of Oxygen Financial in Boston. “There may not be another opportunity.”

Shorter-term borrowing rates, particularly on credit cards, will also quickly head higher.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark, so expect your APR to rise within a billing cycle or two.

If you owe $5,000 on a credit card with an APR of 19% and put $250 a month towards the balance, it will take 25 months to pay it down and cost you $1,060 in interest charges. If the APR edges up to 20%, you’ll pay an extra $73 in interest.

“A single quarter-point rate increase isn’t likely to flip cardholders’ financial world upside down. However, all rate hikes, even small ones, are unwelcome news for folks with credit card debt,” said Matt Schulz, chief credit analyst for LendingTree.

Borrowers could call their card issuer and ask for a lower rate, switch to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a low-interest personal loan,…