How Federal Reserve Interest Rate Hikes Affect Your Borrowing Costs

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From credit cards to mortgages, it’s suddenly much more expensive to borrow money.

The Federal Reserve has raised its short-term policy rate by 3 percentage points since March in a bid to curb relentless inflationwith another rate hike likely next week.

“Borrowers are feeling the pressure from both sides as inflation has weighed on household budgets while borrowing costs for homebuyers, car buyers and credit card borrowers have risen at the fastest rate. fast for decades,” said Greg McBride, chief financial analyst at Bankrate.com.

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It was the combination of higher rates and inflation that hit consumers particularly hard, he said.

The consumer price indexwhich measures the average price change of consumer goods and services, rose 8.2% year-on-year in the latest reading, still near the highest levels since the early 1980s.

And “with more rate hikes to come, this will put additional pressure on the budgets of households with variable rate debt, such as home equity lines of credit and credit cards,” McBride said.

In fact, Fed decisions have already made borrowing considerably more expensive for consumers across the board. Here’s how increases to the benchmark interest rate have impacted the rates consumers pay on the most common types of debt, according to recent figures from Bankrate.

Credit cards: up 234 basis points

  • October average: 18.68%
  • March average: 16.34%

Credit card rates are now over 18% and will likely reach 20% by early next year, while sales are upper and nearly half of credit card holders now carry month-to-month credit card debt, according to a Discount rate report.

With the rate hikes so far, these credit card users will end up paying about $20.9 billion more in 2022 than they otherwise would have, according to a separate analysis by WalletHub.

HELOCs: up 334 basis points

  • October average: 7.30%
  • March average: 3.96%

Home equity lines of credit are also up since, like credit cards, they are directly influenced by the Fed’s benchmark.

On a $50,000 net worth line, interest alone is $125 more per month than it was at the start of the year. “Just like credit cards, it takes time,” McBride said.

Mortgages: up 278 basis points

  • October average: 6.92%
  • March average: 4.14%

Last month, the average interest rate on the 30-year fixed rate mortgage exceeded 6% for the first time since the Great Recession and is now more than double what it was a year ago.

As a result, homebuyers will pay about $30,600 more in interest if they take out a mortgage, assuming a 30-year fixed rate on an average home loan of $409,100, according to WalletHub analysis.

Car credits: +162 basis points

  • October average: 5.60%
  • March average: 3.98%

Paying an annual percentage rate of 6% instead of 3% could cost consumers almost $4,000 more in interest over the term of a $40,000 auto loan over 72 months, according to data from Edmunds.

However, in this case, “rising rates are not the reason the average car payment is over $800 a month,” McBride said. “It’s the sticker price it’s much higher.”

Personal loans: +90 basis points

  • October average: 11.20%
  • March average: 10.30%

Even personal loan rates are higher as the number of people with this type of debt hit a new high in the second quarter, according to TransUnion’s latest report. credit industry report.

“Those with good credit can still get single-digit rates,” McBride said. But anyone with weaker credit will now see “significantly higher rates.”

How to protect against higher prices and tariffs

Amid fears of a recession and further rate hikes to come, consumers should “reduce discretionary spending” where they can, advised Tomas Philipson, a University of Chicago economist and former chairman of the Council of White House economic advisers.

“You’re going to need your money for necessities, which is food, gas, and lodging.”

“If consumers haven’t already assessed their budget after feeling the impact of inflation, they should start it now,” said Michele Raneri, vice president of US research and consulting at TransUnion. .

Cutting costs will also help avoid additional credit card debt and pave the way for increased savings, experts said.

“Have an emergency fund handy,” Raneri warned. “Three to six months of expenses ideally, but even a few hundred extra dollars can prove invaluable if unforeseen circumstances arise.”

“You have to be careful here,” added Philipson. Without sufficient cash reserves, “you are vulnerable”.

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