Here’s what the Fed’s half-point rate hike means for your money

What the Federal Funds Rate Means to You

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to each other overnight. Although this is not the rate consumers pay, Fed decisions still affect the borrowing and savings rates they see every day.

“Rising interest rates mean borrowing costs more and saving will eventually pay more,” McBride said.

“It hints at steps households should take to stabilize their finances – paying down debt, especially expensive credit cards and other variable-rate debt, and increasing emergency savings,” he added. . “Both will make you more resilient to rising interest rates and whatever else might come next economically.”

Credit card borrowers, home buyers could see increases

Short-term borrowing rates, especially on credit cards, are expected to rise.

Since most credit cards have a variable rate, there’s a direct link to the Fed’s benchmark, so expect your annual percentage rate to increase within a billing cycle or two.

“When it comes to increasing credit card APRs, banks waste no time,” said Matt Schulz, chief credit analyst for LendingTree.

Credit card rates are currently just over 16%, significantly higher than almost all other consumer loans and could reach 18.5% by the end of the year – which would be an all-time high, according to Ted Rossman, a senior industry official. analyst at CreditCards.com.

If the APR on your credit card increases to 18.5% in 2022, it will cost you an additional $885 in interest charges over the term of the loan, assuming you have made minimum payments on the average balance of 5 $525, Rossman calculated.

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

“Now is the time for those with credit card debt to focus on reducing,” Schulz said. “This debt will only get more expensive.”

Adjustable rate mortgages and home equity lines of credit are also indexed to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.

But, because longer-term 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the broader economy, most homeowners won’t be hit immediately by a rate hike.

This rate hike is already priced into mortgage rates, according to Jacob Channel, senior economic analyst at LendingTree.

The average interest rate on a 30-year fixed-rate mortgage hit 5.55% this week, the highest since 2009, and rose more than two percentage points from 3.11% at the end of december.

By the end of 2022, “something closer to 6% is not completely out of the question,” Channel said. This means that anyone buying a new home will pay significantly more for their next home loan.

On a $300,000 loan, a 30-year fixed rate mortgage would cost you about $1,283 per month at 3.11%. If you pay more than 5% instead, it would cost $346 more per month or $4,152 more per year and $124,560 more over the life of the loan, Channel calculated.

Even though auto loans are fixed, payments go up because the price of all cars goes up, so if you’re thinking of financing a new car, you’ll be shelling out more in the months ahead.

Federal student loan rates are also fixed, so most borrowers won’t be hit immediately by a rate hike. However, if you have a private loan, those loans can be fixed or have a variable rate tied to Libor, Prime, or Treasury bills – meaning when the Fed raises rates, borrowers are likely to pay more interest. , although how much more will vary by reference.

This makes it a particularly good time to identify outstanding loans and see if refinancing makes sense.

Savers will have to shop around to take advantage

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Although the Fed has no direct influence on deposit rates, they tend to be correlated with changes in the target federal funds rate. As a result, the savings account rate at some of the largest retail banks has been near the bottom, currently just 0.06%, on average.

“National average deposit account rates, dominated by brick-and-mortar banks, have been slow to rise, and this is expected to continue,” said Ken Tumin, founder and editor-in-chief of DepositAccounts.com.

Thanks in part to lower overhead costs, the average online savings account rate is around 0.5%, well above the average rate at a traditional bank.

The rates of the best performing certificates of deposit are above 1%, which is even better than a high yield savings account.

If you have $10,000 in a regular savings account, earning 0.06%, you will only earn $6 in interest per year. In an average online savings account paying 0.5%, you could earn $50, while a five-year CD could earn twice as much, according to Tumin.

However, since the rate of inflation is now higher than all of these rates, any money saved loses purchasing power over time. Still, choosing the right type of account will make a big difference, advised Yiming Ma, assistant professor of finance at Columbia University Business School.

Make sure everything in savings gets a better return through this period of rising rates, she said. “The worst thing would be if your cost of borrowing goes up but you don’t take advantage of the higher savings rate.”

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