How a Federal Reserve 25 basis point interest rate hike impacts 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. On the flip side, higher interest rates also mean savers will earn more money on their deposits.

Here’s a breakdown of how it works:

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, an all-time high. With most people feeling strained by higher prices, more cardholders carry debt from month to month.

“Now people are racking up debt and borrowing at high rates and that’s troublesome,” said Tomas Philipson, University of Chicago economist and the former chair of the White House Council of Economic Advisers.

With this rate increase, consumers with credit card debt will spend an additional $1.7 billion on interest, according to an analysis by WalletHub. Factoring in the hikes between March 2022 and March 2023, credit card users will wind up paying at least $31.7 billion in extra interest charges over the next 12 months, WalletHub found.

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.

Rates are now off their recent peak, but not by much. The average rate for a 30-year, fixed-rate mortgage currently sits at 6.48%, according to Bankrate, down slightly from November’s high but still much higher than it was a year ago.

“This goes to show just how hard it is for many buyers to overcome today’s persistently high home prices and mortgage rates,” said Jacob Channel, senior economic analyst at LendingTree.

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 rate adjusts right away. Already, the average rate for a HELOC is up to 7.99%, according to Bankrate.

Auto loans

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.

The average rate on a five-year new car loan is now…