What another major rate hike by the Federal Reserve means to you
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.
This rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing. “You are peddling into a progressively stiffer headwind as interest rates rise,” McBride said.
“Credit card rates are the highest since 1996, mortgage rates are the highest since 2008, and auto loans are the highest since 2012.”
On the flip side, higher interest rates also mean savers will earn more money on their deposits and, already, “high-yield savings accounts and certificates of deposit are at levels last seen in 2009,” McBride noted.
What borrowers should know about higher rates
• Your credit card rate will rise. 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 your credit card rate follows suit within one or two billing cycles.
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.
Because of this rate hike, consumers with credit card debt will spend an additional $5.3 billion on interest, according to an analysis by WalletHub. Factoring in the rate hikes from from March, May, June, July and September, credit card users will wind up paying around $20.9 billion more in 2022 than they would have otherwise, WalletHub found.
As rates rise, the best thing you can do is pay down high-cost debt — “2022 has been a pretty brutal year for folks with credit card debt, and unfortunately it is likely to get worse before it gets better,” said Matt Schulz, chief credit analyst at LendingTree.
“A 0% balance transfer credit card may be your best weapon in the battle against credit card debt and rising interest rates,” he advised.
Otherwise, consolidate and pay off high-interest credit cards with a lower-interest home equity loan or personal loan, Schulz said.
“You won’t get the 0% rate that you might find with a credit card, but a personal loan can be a good option for refinancing and consolidating loans as rates continue to climb.”
• Mortgage rates are already higher. 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. As a result, “today’s rates are at their highest levels since the Great Recession,” said Jacob Channel, senior economist at LendingTree.
Along with the central bank’s vow to stay tough on inflation, the average interest rate on the 30-year fixed-rate mortgage hit 6%, nearly double what it was at the end of 2021.
On a $300,000 loan, a 30-year, fixed-rate mortgage at…
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