3 Ways the Fed Rate Hike Could Affect Your Finances – Jahanagahi
Personal Finance

3 Ways the Fed Rate Hike Could Affect Your Finances

A young woman reviews her personal finances using print-outs and a tablet at home.

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Rising interest rates affect many aspects of your financial life.

key points

  • The Federal Reserve announced an interest rate increase on Wednesday, May 4, 2022.
  • The increase is the second since 2018 and is a half-percentage-point jump.
  • It could affect your credit cards, savings, and mortgage loans.

On Wednesday, May 4, 2022, the Federal Reserve announced an interest rate increase of a half percentage point. This is the largest rate increase since 2000, and is the second increase since 2018 with the first occurring in mid-March of this year.

This interest rate increases the federal funds rate to between 0.75% and 1.00%, up from a range of 0.25% to 0.50%, and significantly above the near-0% rate during the heart of the pandemic. Unsurprisingly, a large increase in the benchmark interest rate could have a major impact on your finances.

But, how exactly will higher rates affect your money? Here are three big ways.

1. Your credit card debt could become more expensive

Credit cards almost always have variable interest rates. The rate you’ll pay moves along with a financial index, which is affected by changes to the federal funds rate. With the Federal Reserve announcing a significant increase in rates, your credit card issuers will follow suit and likely raise your rates within a billing cycle or two.

As a consequence, if you carry a balance, the monthly interest charges will rise substantially. Your minimum payment could be higher, and it could take you longer and cost you more to repay your total debt balance since more of each monthly payment goes to interest rather than reducing your balance.

You should seriously consider a balance transfer credit card if you can qualify for one. This would enable you to move your current balance to a card that promises a 0% rate for a limited time such as 12 months. Even if you will likely pay an upfront fee to transfer a balance it can be well worth it if you aren’t able to pay off your cards in full quickly.

2. You could be offered a higher interest rate on savings

If you have a lot of money in savings, the Federal Reserve rate increase could actually be good news. The average yield for online bank accounts already rose four basis points in April after the Federal Reserve announced its mid-March rate increase and these increases are likely to accelerate with today’s larger interest rate increase.

It’s good news that savings accounts will soon pay a little more, as the record-high rates of inflation this year have been eating away at the buying power of saved funds. This is especially hard for seniors and those on a fixed income.

3. Mortgage rates will likely increase

There’s still more bad news, though. Mortgage rates are expected to increase further with the Federal Reserve’s announcement — and rates are already up considerably compared with the record low levels they hit during the pandemic. The average rate on a 30-year fixed-rate loan is now well above 5%, up from below 3% during the heart of the coronavirus pandemic.

With mortgage rates rising, new borrowers will find it is more expensive to secure a home loan. Those with adjustable-rate mortgages will also see monthly payments and total interest costs rise. And affordable refinancing opportunities may no longer be available.

The one bright spot, however, is that rising mortgage costs could potentially help to cool the hot housing market. Prices had arisen due to high demand and low supply during the pandemic, but evidence suggests that sale prices and sales of new homes have now begun to drop. If demand falls and prices go down with it, this could enable more borrowers to find homes they can afford to buy even if their mortgage rates are higher.

Ultimately, whether you’re a borrower or a saver, the Federal Reserve’s rate hike is likely to affect you. The key is to understand the impact and make informed decisions so higher rates don’t damage your finances over the long-term.

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