What the Fed’s 25 basis point interest rate hike means for you
What the federal funds rate means to you
“The bank problems are probably making a lot of people think twice,” said Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the Department of Labor. “People are not as confident,” she said, referring to the wealth effect, or the theory that people spend less when they feel less well-off than they did before.
For its part, the Federal Reserve has been trying to rein in inflation by raising its benchmark rate.
The federal funds rate is the interest rate at which banks borrow and lend to one another overnight. But that also influences consumers’ borrowing costs, either directly or indirectly, including their credit card, mortgage and auto loan rates.
How higher rates can affect your wallet
1. Credit cards
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.
Credit card annual percentage rates are now over 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month as Americans, in general, feel increasingly worse off financially.
A 0% balance transfer credit card is “about the best tool available for those with credit card debt,” said Matt Schulz, chief credit analyst at LendingTree. Otherwise, consumers could consolidate and pay off a high-interest revolving balance with a lower-interest personal loan.
Even if monthly payments remain the same, consolidating $10,000 of credit card debt into a personal loan could save borrowers up to $3,000, LendingTree recently found.
2. Home loans
Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.66%, up from 4.40% when the Fed started raising rates last March.
A “For Sale” sign outside of a home in Atlanta, Georgia, on Friday, Feb. 17, 2023.
Dustin Chambers | Bloomberg | Getty Images
Other home loans are more closely tied to the Fed’s 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 adjusts right away. Already, the average rate for a HELOC is up to 7.76% from 3.96% a year ago.
Homebuyers can greatly benefit from shopping around for additional rate quotes, according to Sam Khater, Freddie Mac’s chief economist.
“Our research concludes that homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among multiple lenders.”
3. Car loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the…
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