The Federal Reserve recently raised interest rates by 0.75% bringing the fed funds rate to between 3% to 3.25%. In an effort to rein in inflation, gradual increases are expected to continue into 2023 with rates expected to peak at 4.6% or higher.
Higher interest rates aim to reduce spending as consumers will earn higher commercial interest rates on mortgages, credit card APRs and other loans. While creating limited demand can lower inflation, it will also have a significant impact on people’s finances in both positive and negative ways.
Here’s what this Fed rate increase means to you and your money.
Credit card annual interest rate
Due to recent increases in interest rates, the average credit card APR (annual percentage rate) has fallen from around 16% just months ago to 18.1% currently. This increase can be very costly on your credit card bill if you are only making minimal payments, so now it is more important than ever to avoid keeping balances on your card. Another way you can combat those exorbitant interest rates is to open a card with an introductory annual interest rate of 0% on balance transfers or new purchases, so you can avoid rate hikes while paying down debt.
For more, see our guide on how to pay off credit card debt. And also learn how to get a free credit report.
Mortgages
As always, fixed rate mortgage rates will not increase, but new mortgages or floating rate mortgages will increase, the latter being determined by the yield on the 10-year Treasury, which is currently at its highest level in a year 2011.
For fixed-rate mortgages, 30-year fixed-rate options increased on average from 3% to 6%. In light of the volatility of a variable or adjustable rate mortgage, one way to combat rising interest rates is to consider using the aforementioned fixed rate mortgage. This way, after shopping for the best rates, you’ll be able to contract the fixed rate to avoid future increases.
Additionally, if you have a variable rate mortgage, refinancing for a fixed rate mortgage is also a good idea if you are concerned about the rates going further.
car loans
Auto loan interest rates are currently at their highest level since 2012 and are expected to increase as the Federal Reserve continues to raise interest rates. High prices and limited supply, along with increased interest rates, make it difficult for more people to buy new cars.
Making sure your credit score is higher can help you get a better rate on purchases of new cars and associated credit products, but it’s still important to shop, whether it’s at credit unions or small banks, before financing. See our How to Improve Your Credit Card Score guide for more information.
Also consider other costs associated with your vehicle, such as insurance rates, which rose 5% from 2021 to 2022 as well as fuel prices that continue to rise. Keeping interest rates and associated operating costs low can help manage overall vehicle expenses during periods of inflation.
savings accounts
On the plus side, those with high-yield savings accounts will notice that these increased interest rates also mean more savings for them. Usually, when the Federal Reserve Funds rate goes up, banks will increase their annual rate of return. You’ll especially see an increase in APY at smaller banks, credit unions, or online banks, so you may want to consider banking where you’ll get the best options.
minimum
The Federal Reserve’s decision to increase interest rates by 0.75% will put pressure on borrowers as their loans become more expensive. For this reason, it is important to pay off debts at the highest rates quickly to avoid additional costs and expenses. Also, increasing your credit score with on-time payments and managing your debt ratio will help you get lower APRs on consumer credit products.
Understanding your current debt annual percentage rate and staying ahead of expected price increases will keep consumers out of financial inconveniences and move your future in the right direction.
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