How Federal Reserve’s 75-basis point interest rate hike impacts you

On Jul 27, 2022

What the federal funds rate means to you

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

For starters, the rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing.

On the flipside, higher interest rates also mean savers will earn more money on their deposits.

What borrowers should know about higher rates

Short-term borrowing rates will be among the first to jump.

“With the Federal Reserve raising interest rates at an unprecedented pace, variable rate debts such as credit cards and home equity lines of credit will be the biggest exposure,” said Greg McBride, chief financial analyst at Bankrate.com.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit.

Annual percentage rates are currently just over 17%, on average, but could be closer to 19% by the end of the year, which would be an all-time high, according to Ted Rossman, a senior industry analyst at CreditCards.com.

That means anyone who carries a balance on their credit card will soon have to shell out even more just to cover the interest charges.

With this rate hike, consumers with credit card debt will spend an additional $4.8 billion on interest this year alone, according to an analysis by WalletHub. Factoring in the rate hikes from March, May, June and July, credit card users will wind up paying around $12.9 billion to $14.5 billion more in 2022 than they would have otherwise, WalletHub found.

As rates rise, the best thing you can do is pay down debt before larger interest payments drag you down.

If you’re carrying a balance, try calling your card issuer to ask for a lower rate, consolidate and pay off high-interest credit cards with a lower interest home equity loan or personal loan or switch to an interest-free balance transfer credit card.

“Zero-percent balance transfer offers can be a godsend for folks with credit card debt,” said Matt Schulz, chief credit analyst at LendingTree.

Adjustable-rate mortgages and home equity lines of credit are also pegged to the prime rate, but 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy. Still, anyone shopping for a new home has lost considerable purchasing power as rates almost doubled since the start of the year.

On a $300,000 loan, a 30-year, fixed-rate mortgage at December’s rate of 3.11% would have meant a monthly payment of about $1,283. Today’s rate of 5.54% brings the monthly payment to $1,711. That’s an extra $428 a month or $5,136 more a year and $154,080 more over the lifetime of the loan, according to Jacob Channel, the senior economist at LendingTree.

Even…