The Federal Reserve is expected to raise rates on Wednesday as it seeks to contain soaring inflation.
The first quarter-point increase in the fed funds rate in three years likely lay the groundwork for additional hikes to follow.
“The cumulative effect of rate hikes is what’s really going to impact the economy and household budgets,” said Greg McBride, chief financial analyst at Bankrate.com.
Typically, as borrowing costs rise, consumers spend less, which eventually eases price pressure. But if you’re worried about what that means for your own credit card debt, car loan, mortgage rate, and student loan, here’s a breakdown of what can happen.
For starters, most credit cards have a variable rate, which means there’s a direct link to the Fed’s benchmark.
“A single quarter-point rate hike is not likely to shake up the financial world of cardholders. However, all rate hikes, even small ones, are bad news for people in card debt. credit,” said Matt Schulz, chief credit analyst for LendingTree.
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Borrowers with revolving debt should find an interest-free balance transfer credit card while they can and start paying down the balance, McBride advised.
“It’s a tremendous opportunity to put yourself on the highway to get out of debt,” he said.
A quarter percentage point difference on a $25,000 loan is $3 a month, according to Bankrate’s McBride. “Nobody will have to go from SUV to compact because of [interest] rates are rising,” he said.
As with housing, the biggest hurdle to buying a car is still finding something in your price range.
As the Fed hikes rates, long-term fixed rates mortgage rates are also on the rise, as they are influenced by the economy and inflation.
The average 30-year fixed-rate home loan has already increased at 4.14% – up a full percentage point since November – and is expected to continue to climb.
Many homeowners who have variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, will also be affected. But unlike an adjustable rate mortgage, a home equity line of credit, or HELOC, adjusts immediately rather than once a year.
“A lot of people haven’t dipped into their home line of credit for upgrades, so maybe it’s time to lock in those rates,” said Mark Scribner, managing director of Oxygen Financial in Boston.
Federal student loan rates are fixed, so most borrowers won’t be immediately affected 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.
“If you have private loans, there should be nothing stopping you from refinancing if you find a lower rate,” said higher education expert Mark Kantrowitz. “You just want to be careful not to refinance to a variable rate because those have no choice but to go up.”
Deposit rates will be much slower to react to Fed rate hikes, and even then only modestly.
While 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, savings account rates at some of the larger retail banks hovered near the bedrock, currently just 0.06%, on average.
However, since the rate of inflation is now much higher than that, any money saved loses purchasing power over time.
“Banks are very slow to raise rates,” said Yiming Ma, an assistant professor of finance at Columbia University Business School.
Look for other options with better rates, advised McBride. “Where you put your money will make all the difference.”
Thanks in part to lower overhead costs, the average rate for online savings accounts, which is currently close to 0.5%, is considerably higher than the average rate at a traditional bank, according to Ken Tumin , the founder of DepositAccounts.com.