The Federal Reserve is expected to raise rates on Wednesday as they look to curb soaring inflation.
The first quarter-point hike in the federal funds rate in three years is likely to set the stage for future hikes.
“The cumulative effect of the rate hike is what will really have an impact on the economy and household budgets,” said Greg McBride, chief financial analyst at Bankrate.com.
Typically, as borrowing costs rise, consumers spend less, which ultimately reduces pressure on prices. But if you’re worried about what this means for your own credit card debt, auto loan, mortgage rate, and student loan tab, here’s a breakdown of what can happen.
Credit cards
First, most credit cards have a variable rate, which means a direct link to the Fed’s benchmark.
Credit card rates are currently around 16.34% compared to 17.85% according to Bankrate, but expect your annual interest rate to rise when the Fed makes a move.
“A single quarter-point rate hike is unlikely to turn the financial world of cardholders on its head. However, any rate hike, no matter how small, is unwelcome news for people with credit card debt,” said Matt Schultz, chief credit analyst at Credit Tree.
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Retirees, probably sheltered from inflation, hit some spending
Borrowers with revolving debt should find a credit card to transfer the balance at zero interest while they can and start paying off the balance, McBride advised.
“This is an amazing opportunity to put yourself on the fast track to getting out of debt,” he said.
Auto loans
For those planning to buy a new car in the next few months, the Fed’s interest rate change likely won’t have a significant impact on how much you get.
A quarter percentage point difference on a $25,000 loan is $3 a month, according to Bankrate’s McBride. “No one will have to switch from an SUV to a compact because of [interest] rates are going up,” he said.
As with housing, the biggest hurdle to buying a car remains finding something in your price range.
Mortgage
As the Fed raises rates, long-term fixed mortgage rates are also rising as they are affected by the economy and inflation.
The average 30-year fixed-rate mortgage has already risen to 4.14% – a whole percentage point higher than in November – and is likely to continue to grow.
Many homeowners with adjustable rate mortgages or mortgage lines of credit that are linked to the prime interest rate will also be affected. But unlike an adjustable-rate mortgage, a home-secured line of credit, or HELOC, is adjusted all at once rather than once a year.
“A lot of people haven’t used their equity line to improve yet, it might be time to lock in those rates,” said Mark Scribner, managing director of Oxygen Financial in Boston.
student loans
Federal student loan rates are fixed, so most borrowers won’t be hit immediately by rate hikes. However, if you have a private loan, these loans can be fixed or have a variable rate linked to Libor rates, principal or Treasury bills, meaning that as Fed rates increase, borrowers will likely pay more interest, although both ? much more will vary depending on the benchmark.
This makes this a particularly good time to identify outstanding loans and see if refinancing makes sense.
“If you have private loans, nothing should stop you from refinancing if you find a lower rate,” said higher education expert Mark Kantrowitz. “You just want to be careful not to refinance the floating rate because they have nowhere to go but up.”
Saving
Deposit rates will be much slower to respond to Fed rate hikes, and even then only marginally.
While the Fed has no direct influence on deposit rates; they tend to correlate with changes in the target federal funds rate. As a result, the savings account rate at some of the largest retail banks is teetering at the bottom, currently averaging just 0.06%.
However, since the rate of inflation is currently much higher, any savings will lose 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, McBride advised. “Where you have your money parked will make a difference.”
According to Ken Tumin, founder of DepositAccounts.com.