As the Federal Reserve raised its key interest rate, Americans have seen the effects on both sides of the household ledger: savers enjoy higher returns, but borrowers pay more.
Here’s how it works:
Credit card rates are closely tied to Fed actions, so consumers with revolving debt can expect to see these rates increase, usually within one or two billing cycles. The average credit card rate was 17.25% recently, according to Bankrate.com, compared to 16.34% in March, when the Fed began its series of rate hikes.
“With the frequency of Federal Reserve rate hikes this year, it will be a drumbeat of higher rates for cardholders every two statement cycles,” said Greg McBride, chief financial analyst at Bankrate. com.
Auto loans are also expected to rise, but those increases continue to be overshadowed by the rising cost of buying a vehicle and the price you pay to fill it up with gas. Auto loans tend to track the five-year Treasury bill, which is influenced by the Fed’s key rate, but that’s not the only factor that determines how much you’ll pay.
A borrower’s credit history, vehicle type, loan term, and down payment all factor into this rate calculation.
The average interest rate on new car loans was 5% in the second quarter, Edmunds said, compared with 4.4% in the same period last year. Last month, the share of new car buyers paying $1,000 or more a month on their loans hit a record high of nearly 13%, Edmunds said.
Whether the rate increase will affect your student loan repayments depends on the type of loan you have.
But new batches of federal loans are priced each July, based on the auction of 10-year Treasury bonds in May. Rates on those loans have already surged: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99%, compared to 3.73% for loans disbursed the previous year.
Private student borrowers should also expect to pay more: Fixed-rate and variable-rate loans are tied to benchmarks that track the federal funds rate. These increases usually appear within a month.
30-year fixed mortgage rates do not move in parallel with the Fed’s benchmark rate, but rather follow the yield of 10-year Treasury bills, which are influenced by various factors, including expectations for inflation, Fed actions and how investors are reacting to it all.
Mortgage rates have jumped more than two percentage points since the start of 2022, although they are down from their highs as recession fears led traders to temper their expectations for mortgage rate hikes. the Fed in the future, despite stubbornly high inflationpushing bond yields lower in recent weeks.
Rates on 30-year fixed-rate mortgages averaged 5.54% as of July 21, according to the first report from Freddie Mac. mortgage surveyup from 5.81% a month ago, but up sharply from 2.78% a year ago.
Other home loans are more closely tied to the Fed’s decision. Home equity lines of credit and adjustable rate mortgages — which each carry variable interest rates — typically increase within two billing cycles after a Fed rate change.
Savers looking for a better return on their money will have an easier time – returns have increased, although they are still quite meager.
An increase in the Fed’s key rate often means that banks will pay more interest on their deposits, although this doesn’t always happen right away. They tend to raise their rates when they want to bring in more money – many banks already had a lot of deposits, but that might change in some institutions.
Rates on certificates of deposit, which tend to track same-dated Treasury securities, rose. The average one-year CD in online banks was 1.9% in June, compared to 1.5% the previous month, according to DepositAccounts.com.
The five-year average CD was 2.9% in June, down from 2.5% in May.