What the federal funds rate means to you
The federal funds rate, set by the US Federal Reserve, is the interest rate at which banks borrow and lend to each other overnight. While it’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Such a rate hike would be in line with the prime rate hike and would immediately increase the cost of financing many forms of consumer borrowing. “As interest rates go up, you create a tougher headwind,” McBride said.
“Credit card rates are at their highest since 1996, mortgage rates are at their highest since 2008, and auto loan rates are at their highest since 2012.”
On the other hand, 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 need to know about rate hikes
• Your credit card rate will go up. As the majority credit cards have a floating rate, there is a direct link to the Fed’s benchmark. As the federal funds rate rises, so does the prime rate, and your credit card rate will follow suit within a billing cycle or two.
That means anyone with a balance on their credit card will soon have to shell out even more to cover the interest.
Because of this rate increase, consumers with a credit card will spend more money 5.3 billion dollars per interest, according to a WalletHub analysis. Factoring in rate hikes in March, May, June, July and September, credit card users will pay about $20.9 billion more in 2022 than they would otherwise, WalletHub found.
With rates rising, the best thing you can do is pay off expensive debt — “2022 has been a pretty tough year for people with credit card debt, and unfortunately it’s likely to get worse before it gets better,” said Matt Schultz , LendingTree’s chief credit analyst.
“A 0% balance transfer credit card can be your best weapon in the fight against credit card debt and rising interest rates,” he advised.
Otherwise, consolidate and pay off high-interest credit cards with lower interest real estate loan or personal loan– said Schultz.
“You won’t get the 0% rate you can find with a credit card, but a personal loan can be a good option for refinancing and consolidating loans as rates continue to rise.”
• Mortgage rates are already higher. Adjustable rate mortgages and home equity lines of credit are also tied 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, “rates today are at their highest levels since the Great Recession,” said LendingTree senior economist Jacob Channell.
Along with the central bank’s promise to get tough on inflation, the average interest rate on a 30-year fixed-rate mortgage has reached 6%, nearly double what it was at the end of 2021.
On a $300,000 loan, a 30-year, 3.11% fixed-rate mortgage in December would mean a monthly payment of about $1,283. Today’s rate of 6.02% brings the monthly payment to $1,803. That’s an extra $520 a month, or $6,240 a year, and another $187,200 over the life of the loan, according to LendingTree.
If you’re shopping at home, “don’t worry too much about whether rates might eventually drop,” Channel advised.
If rates fall in the coming years, you may be able to refinance, he noted. “In other words, you shouldn’t feel like you’re locked into today’s rates forever if you decide to buy a home in the near future.”
• Car loans are more expensive. Despite that car loans fixed, payments go up because the price of all cars goes up along with interest rates on new loans, so if you plan to buy a caryou will shell out more in the coming months.
The Fed’s latest move could raise the average interest rate on a new car loan to 6%. consumers with higher credit ratings may be able to secure better loan terms.
Paying a 6% APR instead of 5% would cost consumers $1,348 more in interest over a 72-month $40,000 car loan, according to Edmunds.
“Car shopping is a high-value commodity where interest rates matter,” said Ivan Drury, director of research at Edmunds. “They can make or break a deal, and rapidly rising interest rates could easily push many consumers out of their comfort zone for monthly payments.”
• Student loans vary by type. Federal student loan rates are also fixed, so most borrowers will not be immediately affected by the rate increase. But if you’re looking to borrow money for college, the interest rate on federal student loans for the 2022-2023 school year has already risen to 4.99%, up from 3.73% last year and 2.75% in 2020-21 years.
If you have a private loan, these loans can be fixed or have a variable rate linked to Libarprime or T-bill rates — This means that when the Fed raises rates, borrowers will likely pay more interest, although the amount will vary by benchmark.
Currently, average fixed rates for private student loans can range from 3.22% to 13.95% and from 1.29% to 12.99% for variable rates, according to Bankrate. As with auto loans, they also vary widely based on your credit score.
Certainly, anyone with education debt should check to see if they have it is eligible for federal student loan forgiveness.
What investors should know about higher rates
• Investors will have to shop around to reap the benefits. The good news is that interest rates on savings accounts have finally risen after several consecutive rate hikes.
Although the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate, and savings account rates at some of the largest retail bankswhich were near the bottom for the most part the covid pandemiccurrently averaging up to 0.13%.
Thanks in part to lower overhead costs, rates on the highest-yielding online savings accounts are as high as 2.5%, which is much higher than the average rate at a traditional brick-and-mortar bank.
As the central bank continues its rate hike cycle, those yields will also rise. However, according to Ken Tumin, founder of DepositAccounts.com, they may not increase as much as expected.
Know that your dollar will not pay off as much as before.
chief client operations officer at National Debt Relief
“Many banks are still rich in deposits and are not raising rates aggressively,” Tumin said. In fact, savings account rates are lower today than they were in early 2019, when the federal funds rate was the same, he noted.
However, since inflation is now higher than all of these indicators, any savings lose purchasing power over time.
“Know that your dollar isn’t going to pay off as much as it used to,” said Natalia Brown, chief client operations officer for National Debt Relief.
“If you’re already struggling to keep your head above water, this is an opportunity to review your finances,” Brown said. But “before you take out additional credit, ask for help,” she added.