This week, Federal Reserve likely to raise rates by 3/4 percentage point for the third time in a row in an attempt to cool down the high cost of living.
The US central bank has raised interest rates four times this year, for a total of 2.25 percentage points.
Mark Hamrick, senior economic analyst at Bankrate.com, said Fed officials have “declared inflation ‘public enemy number 1′”.
“They want to get their benchmark rate into restricted territory and keep it there longer to wait for what Chairman Jerome Powell has said should be ‘convincing evidence that inflation is falling’,” he said. “We’re still far from that destination.”
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The federal funds rate, set by the central bank, is the rate at which banks borrow and lend to each other overnight. While that’s not what consumers pay, the Fed’s moves still affect the interest rates consumers see every day on things like private student loans and credit cards. .
The upcoming rate hike will correspond to an increase in the prime rate and immediately make financing higher for many types of consumer loans.
“Whenever consumers borrow, they depend on interest rates, whether it “House, car or appliance. Economic Advisor.
Here’s a breakdown of some of the key ways an interest rate hike could affect you, and how it could affect credit cards, car loans, mortgages, student debt, and deposits. save.
1. Credit card
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Because most credit has a variable rate, which has a direct relationship with the Fed’s benchmark. As the federal funds rate rises, so does the prime rate, and so does the credit card rate.
The annual percentage is now an average of nearly 18%, an all-time recordaccording to Ted Rossman, a senior industry analyst at CreditCards.com.
Furthermore, nearly half of credit cardholders carry credit card debt from month to month, according to one Bankrate.com report.
“Credit card debt is easy to get in and hard to get out of,” says Rossman. “High inflation and rising interest rates are making it even harder.”
If the Fed announces a 75 basis point increase as expected, consumers with credit card debt will spend more 5.3 billion dollars on interest rates just this year, according to a new analysis by WalletHub.
Adjustable-rate mortgages and home ownership line of credit are also fixed to the prime rate, but the 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy. However, anyone buying a new home has lost significant purchasing power, in part due to inflation and the Fed’s policy moves.
Coupled with the central bank’s pledge to stay firm against inflation, the average 30-year fixed-rate mortgage rate has hit 6% for the first time since the Great Recession. double from a year ago, according to the latest data. from the Mortgage Bankers Association.
As a result, homebuyer mortgage demand has fallen by almost a third since last year, and fewer borrowers can benefit from refinancing.
Since the upcoming rate hike is mostly baked into mortgage rates, the homebuyer will have to pay about $30,600 more in interest right now, assuming a 30-year fixed rate on the average home loan. is $409,100, according to Analysis of WalletHub.
3. Car loan
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In spite of Auto loan is fixed, the payments are getting more and more because the prices of all cars are going up along with the interest rate of the new loans, so if you are planning buy a carYou will out more in the coming months.
The Fed’s next move could push the average rate on new car loans to 6%, though consumers with higher credit scores can secure better loan terms.
“Cars are big-ticket items when interest rates matter,” said Ivan Drury, chief information officer 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.”
Paying an annual percentage rate of 6% instead of 5% will cost consumers an additional $1,348 in interest over the course of a 72-month $40,000 car loan, according to data from Edmunds. from Edmunds.
4. Student Loans
Interest rates on federal student loans for the 2022-2023 school year have increased to 4.99%, up from 3.73% last year and 2.75% in 2020-2021. It won’t change until next summer: Congress sets the rate for federal student loans in May each year for the upcoming school year based on the 10-year Treasury rate. That new rate went into effect in July.
Private student loans can have a fixed rate or a variable rate tied to Libor, prime rate or Treasury bill – and that means, when the Fed raises rates, those borrowers will also have to pay more interest. However, how much extra will vary by benchmark.
Currently, fixed interest rates for the average private student can range from 3.22% to 13.95% and 1.29% to 12.99% for variable rates, according to Bankrate. As for car loans, they also vary widely based on your credit score.
Of course, anyone with current education debt should check if they have Eligible for federal student loan forgiveness.
5. Savings account
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On the other hand, savings deposit interest rates tend to increase after consecutive interest rate increases.
Although the Fed has no direct influence on deposit rates, they tend to correlate with changes in the federal funds target rate, and savings account interest rates at some of the largest retail bankswas near the bottom of the rock for most of it Covid pandemiccurrently averages up to 0.13%.
Thanks in part to a reduction in overheads, the top yielding online savings account rate is as high as 2.5%, much higher than the average rate for a traditional bank.
As the central bank continues its cycle of rate hikes, these yields will also continue to rise. However, any money that earns less than the inflation rate loses purchasing power over time.