What does a federal reserve rate increase mean for mortgages, credit cards, and more

As the Federal Reserve has steadily raised its key interest rate over the past year, Americans have seen the effects on both sides of the household ledger: savers benefit from higher returns, but borrowers pay more.

Here’s how the increasing rates affect consumers.

credit cards

Credit card rates are closely related to Fed actions, so consumers with revolving debt can expect those rates to rise, usually within one or two billing cycles. The average credit card rate was just over 20 percent as of April 26, according to Bankrate.com, up from about 16 percent in March last year, when the Fed began its series of interest rate increases.

auto loans

Auto loans tend to track a five-year Treasury Note, which is affected by the Federal Reserve’s key rate — but that’s not the only factor that determines how much you’ll pay.

The borrower’s credit history, vehicle type, loan term, and down payment are all factored into this rate calculation. The average interest rate on new car loans was 7 percent in March, according to Edmonds, up nearly a percentage point from six months earlier.

Student loans

Whether the rate increase will affect your student loan payments depends on the type of loan you have.

The rate of current borrowers of federal student loans is not affected because these loans carry value Fixed exchange rate set by the government. The Biden administration’s program to cancel up to $20,000 in federal loans has been blocked by legal challenges that recently reached the Supreme Court; The court heard arguments in February and is expected to reach a decision in the coming months.

But new batches of the federal loans are priced each July, based on the 10-year Treasury auction in May. rates on those Loans have already jumped: Borrowers with federal college loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed in the same period a year earlier.

Private student loan borrowers should also expect to pay more: Both fixed- and variable-rate loans are tied to federal funds rate tracking standards. These growths usually appear within a month.

Mortgages

30-year fixed mortgage rates do not move in tandem with the Fed’s benchmark rate, but instead generally track the yield on 10-year Treasury notes, which are affected by a variety of factors, including expectations about inflation, and the Bank’s actions. The Federal Reserve and how investors react to it all.

After jumping above 7 percent in November, for the first time since 2002, mortgage rates fell nearly 6 percent in February before drifting to 6.4 percent last week, according to Freddie Mac. The average comparable loan rate was 5.1 percent in the same week of 2022.

Other home loans are closely related to the Fed’s move. Home equity lines of credit and adjustable mortgages — each of which carry variable interest rates — generally go up within two billing cycles after a change in Fed rates.

Savings vehicles

Savers seeking a better return on their money will have an easier time — returns have gone up, but not uniformly.

An increase in the Fed’s key interest rate often means that banks will pay more interest on their deposits, although it doesn’t always happen right away. They tend to raise their rates when they want to bring in more money, and recent turmoil in the financial industry may prompt banks to raise interest rates to persuade anxious depositors to keep money in their accounts.

Prices for certificates of deposit, which tend to track similar-dated Treasury notes, have been rising. The average one-year certificates of deposit in online banks was 4.7 percent at the start of April, up from 0.7 percent a year ago, according to DepositAccounts.com.