What’s prompting the rate increases?
The short answer: inflation. Inflation has been slowing in recent months, but it’s still high. Measured over a year earlier, consumer prices were up 5% in March, down sharply from February’s 6% year-over-year increase.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.
Fed Chair Jerome Powell has acknowledged in the past that aggressively raising rates would bring “some pain” for households but said that doing so is necessary to crush high inflation.
Who is most affected?
Anyone borrowing money to make a large purchase, such as a home, car or large appliance, will likely take a hit. The new rate will also increase monthly payments and costs for any consumer who is already paying interest on credit card debt.
“Consumers should focus on building up emergency savings and paying down debt,” said Greg McBride, Bankrate.com’s chief financial analyst. “Even if this proves to be the final Fed rate hike, interest rates are still high and will remain that way.”
What’s happening with credit cards?
Even before the Fed’s latest move, credit card borrowing had reached the highest level since 1996, according to Bankrate.com.
The most recent data available showed that 46% of people were carrying debt from month to month, up from 39% a year ago. Total credit card balances were $986 billion in the fourth quarter of 2022, according to the Fed, a record high, though that amount isn’t adjusted for inflation.
For those who don’t qualify for low-rate credit cards because of weak credit scores, the higher interest rates are already affecting their balances.
How will an increase affect credit card rates?
The Fed doesn’t directly dictate how much interest you pay on your credit card debt. But the Fed’s rate is the basis for your bank’s prime rate. In combination with other factors, such as your credit score, the prime rate helps determine the Annual Percentage Rate, or APR, on your credit card.
The latest increase will likely raise the APR on your credit card 0.25%. So, if you have a 20.9% rate, which is the average according to the Fed’s data, it might increase to 21.15%.
What if i have money to save?
After years of paying low rates for savers, some banks are finally offering better interest on deposits. Though the increases may seem small, compounding interest adds up over the years.
Interest on savings accounts doesn’t always track what the Fed does. But as rates have continued to rise, some banks have improved their terms for savers as well. Even if you’re only keeping modest savings in your bank account, you could make more significant gains over the long term by finding an account with a better rate.
Will this affect home ownership?
Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage edged up to 6.43% from 6.39% the week prior. A year ago, the average rate was lower: 5.10%. Higher rates can add hundreds of dollars a month to mortgage payments.
Rates for 30-year mortgages usually track the moves in the 10-year Treasury yield. Rates can also be influenced by investors’ expectations for future inflation, global demand for U.S. Treasuries and what the Fed does.
Most mortgages last for decades, so if you already have a mortgage, you won’t be impacted. But if you’re looking to buy and already paying more for food, gas and other necessities, a higher mortgage rate could put home ownership out of reach.
What if i want to buy a car?
With shortages of computer chips and other parts easing, automakers are producing more vehicles. Many are even reducing prices or offering limited discounts. But rising loan rates and lower used-vehicle trade-in values have erased much of the savings on monthly payments.
Since the Fed began raising rates in March 2022, the average new-vehicle loan rate has jumped from 4.5% to 7%, according to Edmunds data. Used vehicle loans dropped slightly to 11.1%. Loan durations average around 70 months — nearly six years — for new and used vehicles.